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Why EQT Midstream Trades at a Premium to Its Peers

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EQM’s enterprise value

EQT Midstream (EQM) is the second-largest company according to EV (enterprise value) in the peer group described in this part. Currently, the company has an EV of $6.4 billion. Western Gas Partners (WES) has a higher EV than EQT Midstream. EV, which is approximately equal to the market equity value plus the net debt (debt less cash), is an important metric for calculating the valuation of an entire business. Equity value alone just represents the value to equity holders.

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EQM’s forward valuation multiple

Of the selected companies, EQT Midstream has the highest consensus forward EV/EBITDA (enterprise value to earnings before interest, tax, depreciation, and amortization) multiple, with 11.5x, while Crestwood Equity Partners (CEQP) has the lowest multiple, with 7.5x. EQT Midstream’s high forward EV/EBITDA most likely reflects a premium for its relatively stable earnings, strong distribution growth, impressive distribution coverage, and asset dropdown opportunities from its sponsor, EQT Corporation (EQT). According to EQT Corporation’s recent press release, it is planning an asset dropdown for EQT Midstream in the first half of 2016.

EQT Midstream’s operating margin

With 79.0%, EQT Midstream has the highest operating margin among the selected peer group. This solid operating margin is due to its low operating expenses. For 3Q15, EQT Midstream’s total operating expenses were $45.9 million, while its operating revenues stood at $148.8 million. EQT Midstream alone constitutes ~4.5% of the Global X MLP ETF (MLPA).

EQT Midstream’s distribution yield

EQT Midstream has the lowest distribution yield among the selected peer group. Low distribution yield indicates less risk and a lower cost of equity capital. Crestwood Equity Partners (CEQP) has the highest distribution yield in the group, with 37.3%. Crestwood Equity’s high distribution yield can be attributed to its stagnant distribution growth, declining throughput volumes, and high leverage. For an in-depth analysis of Crestwood Equity’s recent operating and market performance, read Is Crestwood Equity Partners a Sinking Ship?

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