EQT Midstream: Standout in Energy

06/13/2016 7:00 am EST


Richard Moroney

Editor, Dow Theory Forecasts

Our latest featured recommendation operates a network of storage facilities and pipelines funnels natural gas to customers and cash distributions to investors, notes Richard Moroney, editor of Dow Theory Forecasts.

Why recommend an energy stock now? After all, the average overall quantitative score for the S&P 1500 Index’s 88 energy stocks has slumped to 27; before 2016 it had never ended a month below 30.

But EQT Midstream (EQM) -- a member of our Top 15 Utilities Portfolio -- is an oddity among S&P 1500 energy stocks.

Not one S&P 1500 energy stock increased per-share profits and revenue more than 5% over the past 12 months. EQT Midstream, not a part of the index, grew both more than 20%.

More energy stocks cut their dividends in the past 12 months than raised them; EQT Midstream increased its distribution 23%. EQT Midstream shares have returned 19% including dividends over the past six months; energy stocks have averaged a 2% loss.

The fate of most energy firms depends heavily on the price of oil or natural gas. EQT Midstream, however, generates revenue from long-term contracts and usage fees, limiting its direct exposure to fluctuations in commodity prices.

The firm’s corporate structure is also untraditional. It was formed by EQT (EQT) in 2012 to operate midstream assets in the Appalachian Basin — an attractive location, given its proximity to the Marcellus and Utica shale formations.

The two companies remain closely linked; EQT Midstream has relied on EQT for 69% to 78% of annual revenue in each of the past four years.

As an MLP, EQT Midstream must generate at least 90% of its cash flow from real estate, natural resources, or commodities in order to avoid paying income taxes. Note, however, MLPs also pass on their tax complexity to investors, who will receive a Form K-1 at tax time.

The MLP currently yields 3.9%. At 16 times trailing earnings, the EQT Midstream trades at a 33% discount to its three-year average. It also trades at 15 times estimated 2016 profits, an 11% discount to the median S&P 1500 energy stock.

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