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Why EQT Midstream and Its General Partner Look Promising in 2018

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EQT Midstream Partners

EQT Midstream Partners (EQM) and its GP (general partner) EQT GP Holdings (EQGP) could be top MLP performers in 2018. Despite the recent rally, EQM stock has a strong upside potential from the current level considering its attractive valuation, low leverage, and strong expected earnings growth. However, EQGP loses on the valuation front. Its strong expected distribution growth seems somewhat priced in. That pushes EQGP’s rank below EQM’s.

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Valuation

EQT Midstream Partners was trading at a forward EV-to-EBITDA (enterprise value to earnings before interest, tax, depreciation, and amortization) multiple of 8.4x as of January 5, 2018. That’s below the historical five-year and one-year averages of 12.9x and 9.3x, respectively. EQT Midstream Partners’ current distribution yield of 5.2% is also higher than the one-year average of 4.9%. On the other hand, EQGP was trading at a forward EV-to-EBITDA multiple of 14.6x as of January 5, 2018, which is higher than the peer median average of 6.7x. However, its current multiple is still lower than the historical average of 16.3x.

Leverage

EQT Midstream Partners’ net debt-to-EBITDA was 1.6x as of September 30, 2017. That’s slightly higher than Noble Midstream Partners (NBLX) but still significantly below the industry median of 4.5x. We looked at NBLX’s leverage position in the previous part of this series.

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Earnings growth

EQT Midstream Partners is expected to post a 17.7% YoY (year-over-year) EBITDA growth in 2017. That’s expected to be driven by strong reservation revenue growth. Analysts also expect EBITDA growth of ~19% CAGR (compound annual growth rate) during the 2018–2020 period. EQM recently announced its distribution outlook for 2018. The Appalachian-based natural gas gatherer expects to grow its distribution by 15%–20% over the next several years, including 2018. At the same time, EQGP expects annual distribution growth of 30%–40%.

Analyst recommendations

About 86.7% of analysts rate EQM a “buy,” while the remaining 13.3% rate it a “hold.” The MLP has no “sell” recommendations. On the other hand, 61.5% of analysts rate EQGP a “buy,” and the remaining 38.5% rate it a “hold.” EQM’s and EQGP’s average target prices of $88.80 and $32.10, respectively, imply ~16% and ~9% upside potentials, respectively, from the current price levels.

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