Should you Invest in this Energy IPO?
Matthew is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
The stock market provides something for everyone's risk appetite. A few weeks after one of the most hyped IPOs failed to live up to its hype, another IPO quietly hit the market with more energy than you'd expect. With much less fanfare, EQT Midstream Partners (NYSE: EQM) has run up nearly 16% from its offering price. Is this a sign of things to come, or should investors pass?
First thing first, it’s important to note their relationship with EQT Corp (NYSE: EQT), which spun out EQT Midstream and still holds a 2% general partner interest in addition to owning 57.4% of the limited partner interest. This relationship between the two companies is listed as one of EQT Midstream’s competitive strengths, as their strategy includes pursuing accretive transactions from EQT. EQT Corp seeded the company with two core assets to build upon and to drive unitholder distributions.
The first of the two assets, the Equitrans Transmission and Storage System, includes a 700-mile FERC-regulated, interstate pipeline system that connects to five interstate pipelines and multiple distribution companies. The system is supported by 14 associated natural gas storage reservoirs with approximately 400 MMcf per day of peak withdrawal capability and 32 Bcf of working gas capacity. The second asset, Equitrans Gathering System, consists of approximately 2,100 miles of FERC-regulated, low-pressure gathering lines that have multiple delivery interconnects. This small start doesn't mean big growth doesn't lie ahead.
Their plan is to use the approximately $282 million of public capital to acquire assets from drop-down transactions from EQT and develop additional organic growth projects. So no matter how you slice it, this company will have a very close relationship with EQT for a long time. Currently, 65% of the contracted volume is provided by EQT, meaning their ability to attract other producers will be also be crucial to their future growth. Until they start putting this capital to work, the company is all about keeping the gas flowing through their systems.
For 2012 EQT Corp has planned about $280 million in cap ex for both gathering additions and for Equitrans capacity increases. Looking out even further, EQT sees the need for $20 billion of infrastructure needed to meet the growth of the Marcellus by 2020. While they'll be sharing these investment opportunities with many other producers and midstream companies, it does show how immense the opportunity is for this business.
In the meantime, investors are banking on the distributions to be flowing; the MLP is projected to yield around 7% when it begins paying unit holders. This transaction marks one of several midstream transactions over the past few years as we are seeing more E&P companies placing their midstream assets into these income-producing vehicles. The goal is to access capital from investors who are looking for income. These spinoff IPOs give investors a chance to buy into great cash-producing assets which nice growth profiles.
One recent example comes from Chesapeake Energy (NYSE: CHK), which did this with their midstream assets by creating Chesapeake Midstream Partners (NYSE: CHKM). Chesapeake Midstream started as a joint venture between Global Infrastructure Partners and Chesapeake in 2009 and followed with a 2010 IPO. While Chesapeake recently sold the balance of their stake to Global Infrastructure Partners in an attempt to shore up their balance sheet, the business had become less reliant on the parent for growth. As focus shifted to its own organic growth and acquisition opportunities, it provided unit holders a more independent company. Over time EQT Midstream could follow this model as they grow to benefit their newly minted unitholders, instead of to please their parent.
All that being said and while I think EQT Midstream has a lot of potential growth, keep in mind that this is a very small company with an $800 million market cap and just two assets. Compare this to Enterprise Products Partners (NYSE: EPD) and their $8 billion growth pipeline currently under construction. While you’ll get a smaller current yield at just under 5%, that’s a lot of growth to fuel distribution increases. Not to mention they no longer have a general partner to pay, meaning all the income not retained to invest in growth projects makes its way to back to unitholders. If you like the income that pipeline companies provide, I think Enterprise makes a better investment.
latimerburned owns shares of Enterprise Products Partners L.P. The Motley Fool has the following options: long JAN 2013 $16.00 calls on Chesapeake Energy, long JAN 2013 $25.00 calls on Chesapeake Energy, long JAN 2014 $20.00 calls on Chesapeake Energy, and long JAN 2014 $30.00 calls on Chesapeake Energy. Motley Fool newsletter services recommend Enterprise Products Partners L.P.. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. If you have questions about this post or the Fool’s blog network, click here for information.