EQT Midstream IPO Offers Higher Yield Than Peers as Gas Slumps
EQT Midstream Partners LP (EQM), operator of natural-gas pipelines in the Marcellus Shale region, is paying a higher yield than larger peers to attract buyers to its initial public offering as the fuel hovers near a 10-year low.
EQT Midstream is being taken public by parent EQT Corp. (EQT), one of the biggest producers in the gas-rich region. Pittsburgh-based EQT Midstream is seeking as much as $263 million in the sale slated for tomorrow, offering 12.5 million common units for $19 to $21 each, according to data compiled by Bloomberg and regulatory filings.
At the midpoint, the proposed annual dividend of $1.40 a share would pay investors about 7 percent, compared with the 6 percent 12-month yield of Williams Partners LP (WPZ) and the 6.2 percent annual payout to MarkWest Energy Partners LP (MWE) investors, data compiled by Bloomberg show. The higher payout may help EQT Midstream woo investors as it attempts to expand its customer base and reduce reliance on its parent, said Jason Stevens, an analyst at Morningstar Inc. (MORN) in Chicago.
“The market would likely perceive EQT Midstream as an unproved player until they get their feet wet and demonstrate the ability to gather third-party volumes as well as grow,” Stevens said. Williams and MarkWest “are both larger-scale limited partnerships with a track record for growth.”
EQT Midstream’s IPO will be the first in the U.S. in more than a month, after Facebook Inc. raised $16 billion in a May 17 offering. The drought has helped put global IPOs on pace to raise about $113 billion in 2012, the smallest yearly amount since 2009, according to data compiled by Bloomberg.
Natalie Cox, a spokeswoman for EQT Corp., declined to comment on the IPO, citing Securities and Exchange Commission rules barring companies from making statements prior to offerings.
EQT Corp. accounted for 65 percent of total gas transmission and gathering volumes at EQT Midstream in the three months through March 31, according to a regulatory filing. EQT Midstream’s growth will partly depend on its ability to win additional contracts with other gas producers, the filing shows.
EQT Midstream will operate in the Marcellus Shale region in Pennsylvania and West Virginia, where EQT Corp. is one of the biggest gas producers, according to the filing. Dry gas production in the Northeast will almost double by 2035 compared with 2009, primarily because of resources in the Marcellus Shale, the filing shows, citing the U.S. Energy Information Administration.
EQT Corp. will own about 65 percent of the assets operator after the IPO. EQT Midstream mostly handles gas produced through hydraulic fracturing, or fracking, a drilling technique that has improved production in the Marcellus Shale.
Annual extraction from unconventional resources may rise to 1.6 trillion cubic meters in 2035 to account for 32 percent of all gas production, up from 14 percent this year, the International Energy Agency said in a report released last month. That figure will only be reached if companies and regulators are transparent, monitor environmental impacts and take the concerns of local communities seriously, according to the report.
Fracking, the practice of pumping water, sand and chemicals into wells to extract gas from hard-to-exploit shale rock, helped the U.S. overtake Russia as the world’s biggest producer of the fuel. Opposition to the technique has slowed the development of gas in Europe, creating export opportunities for U.S. producers hurt by low prices and a glut of gas at home.
Companies temporarily suspended the process in the U.K. after it was linked to a series of earthquakes. Bulgaria and France outlawed it over environmental concerns.
Last week, President Barack Obama’s administration gave U.S. gas producers more time to comment on draft standards for disclosing chemicals used in hydraulic fracturing. The draft rules, introduced on May 4, would require companies exploring for natural gas to disclose the chemicals used in the fracking process and adhere to well design.
While EQT Midstream, as a conduit for gas rather than a producer, may be indirectly exposed to the downsides of fracking, any large-scale moratorium on the process in Pennsylvania would diminish volume and cash flow, Morningstar’s Stevens said.
Net IPO proceeds to EQT Midstream, estimated at about $230 million, will be used to pay a cash distribution to the parent, cover some capital spending planned in the next two years, and replenish working cash.
EQT Midstream will be listed on the New York Stock Exchange under the symbol EQM. Citigroup Inc. and Barclays Plc are leading the offering. The midstream operator would be valued at $707.7 million at the midpoint of the IPO price range.
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