IPOs, Initial Public Offerings: pre & post IPO

EQT Midstream Partners, LP (EQM)

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Update: Tuesday, June 26.
Investors seem to like EQM’s general partner (NYSE:EQT) so the deal is heating up a little; priced at $21

Update:  Monday, June 25.  The five stocks we use for sector comparison are down an average of 4% in the last five calendar days.

Stock Price

5 day

June 20, 2012

June 25

% change

Copano Energy LLC (CPNO)

$27.73

25.23

-9.0%

Energy Transfer LP (ETP)

$45.24

44.21

-2.3%

Inergy Midstrm (NRGM)*

$20.76

20.32

-2.1%

EQT Midstream Partners, LP (EQM)
DCP Midstream Prtnrs(DPM)

$39.13

36.75

-6.1%

Kinder MorganEnrgy LP (KMP)

$76.00

75.09

-1.2%

5 day ave change

-4%

* NRGM IPO’d Dec 15, 2011 at $17, below price range mid-point of $20

Even so, some IPO sources are suggesting EQT might go to a 50 cent premium from the price range mid-point of $20.

Based on the 5 day, 4% sector decline our conclusion is that EQT should be priced lower than the price range-midpoint of $20, to minimize sector risk — unless Obamacare is neutered later this week, in which case the stock market is expected to go up.

———————————-
Based in Pittsburgh, PA, EQT Midstream Partners, LP (EQM), EQT Midstream Partners, LP (EQM) scheduled a $250 IPO with a market capitalization of $708 million at a price range mid-point of $20, for Wednesday June 27, 2012.

[S-1] updated June 18, 2012.  Original S-1 filed February 13, 2012.

UNDERWRITERS
Manager, Joint Managers:  Citigroup; Barclays
Co Managers: BofA Merrill Lynch; Credit Suisse;J.P. Morgan;Wells Fargo Securities;Deutsche Bank; Goldman, Sachs; RBC Capital

SUMMARY
EQM is a growth-oriented limited partnership formed by EQT Corporation (NYSE: EQT) to own, operate, acquire and develop midstream assets in the Appalachian Basin.

EQM’s General Partner
EQT Corporation (NYSE: EQT), $7.6 billion market cap — is EQM’s general partner, sponsor, largest customer and is one of the largest natural gas producers in the Appalachian Basin.

EQM’s projected minimum payout at the price range mid-point of $20 is 7%.

Pre-IPO grade-score summary
. Many IPOs in today’s environment are graded C+ and scored 7
. If the pre-IPO grade is below C+ or the score is below 7,
then our analysts may have some concerns about the company’s
outlook and/or its market segment
. If the pre-ipo grade is above C+ or the score is above 7,
then our analysts believe the company’s overall business outlook
is more favorable
Glossary of financial terms

SCORECARD

Mgt

Market

Market Do-

Proprie-

Total

1-5, 5 is high

Growth

mination

tary

rating

20 is perfect

2

2

2

1

7

COMPARE & CONTRAST

Valuation Ratios

IPO Mrkt

% Yield

Price /

% offered

Sept 2011fiscal year

Cap (mm)

BookValue

in IPO

EQT Midstream Partners, LP (EQM)

$708

7.0%

1.6

35%

Mid stream L.P.s

Mrkt

% Yield

Price-to-

Stock Price

StockPrice

YTD

SORTED BY YIELD

Cap (mm)

book ratio

Jan 1, 2012

June 20, 2012

change

Copano Energy LLC (CPNO)

$2,000

8.3%

2.3

$34.20

$27.73

-18.9%

Energy Transfer LP (ETP)

$10,390

8.0%

1.5

$45.85

$45.24

-1.3%

Inergy Midstrm (NRGM)*

$1,540

7.3%

2.4

$18.95

$20.76

9.6%

EQT Midstream Partners, LP (EQM)

$708

7.0%

1.6

DCP Midstream Prtnrs(DPM)

$2,030

6.7%

2.0

$47.47

$39.13

-17.6%

Kinder MorganEnrgy LP (KMP)

$25,810

6.3%

3.6

$84.95

$76.00

-10.5%

Source: Google finance

Average YTD change

-8%

* NRGM IPO’d Dec 15, 2011 at $17, below price range mid-point of $20

CONCLUSION
At 7% annual minimum payout EQM is not offering a particularly high payout rate relative to other midstream companies, but the price is at the lower end of the price-to-book value range.

Notice that three of the five comparables above have traded down over 10% YTD, and only one is up YTD.

RECOMMENDATION
If EQT IPOs at $20 IPOdesktop would pass on the IPO.  If on the other hand the EQT IPO is priced below $20 it’s probably worth taking.

PARTNERS CAPITAL
Proforma $434mm pre-IPO.  Post-IPO EQM’s market capitalization would be $708 million at the price range mid-point of $20.

BUSINESS
EQM is a growth-oriented limited partnership formed by EQT Corporation (NYSE: EQT) to own, operate, acquire and develop midstream assets in the Appalachian Basin, for natural gas transmission and storage.

EQM provides substantially all of its natural gas transmission, storage and gathering services under contracts with fixed reservation and/or usage fees, with a significant portion of revenues being generated from long-term firm contracts.

EQM initially focuses operations in the Marcellus Shale fairway in southern Pennsylvania and northern West Virginia, a rapidly growing natural gas play and the core operating area of EQT.

EQT Corporation (NYSE: EQT), $7.6 billion market cap — is EQM’s general partner, sponsor, largest customer and is one of the largest natural gas producers in the Appalachian Basin.

ABOUT EQT Corporation
EQT Corporation (EQT) conducts its business through three business segments: EQT Production, EQT Midstream and Distribution. EQT Production is a natural gas producer in the Appalachian Basin with 5.4 trillion cubic feet equivalent of proved reserves across 3.5 million acres, as of December 31, 2011.

CONTRACT RATES
As of March 31, 2012 54% of EQM’s contracted transmission firm capacity was subscribed at the maximum recourse rate allowed under the tariff.

The remaining 46% of contracted transmission firm capacity was subscribed by customers under negotiated rate agreements at rates generally above the maximum recourse rate under the tariff.

COMPETITION
Principal competitors in the natural gas transmission and storage market include companies that own major natural gas pipelines, such as Dominion Transmission, Columbia Gas Transmission Corp., National Fuel Gas Company and Texas Eastern. In addition, we compete with companies such as Caiman Energy, M3 Midstream, LLC, Williams Partners L.P., Superior Pipeline Company, LLC and MarkWest Energy Partners, who are building high pressure gathering facilities that are not subject to FERC jurisdiction to move volumes to interstate pipelines.

DISTRIBUTION POLICY
EQM’s partnership agreement requires EQM to distribute all available cash quarterly.

EQM anticipates that distributions from the operating surplus will generally not represent a return of capital.  EQM does not anticipate that it will make any distributions from capital surplus.

DIVIDENDS
EQM anticipates a minimum quarterly distribution of $0.3500 per unit for each complete quarter, or $1.40 per unit on an annualized basis.

7% annualized return

INTERCONNECTIONS
EQM depends upon third-party pipelines and other facilities that provide receipt and delivery options to and from EQM’s transmission and storage system.

For example, EQM’s transmission and storage system interconnects with the following interstate pipelines: Texas Eastern, Dominion Transmission, Columbia Gas Transmission, Tennessee Gas Pipeline Company and National Fuel Gas Supply Corporation, as well as multiple distribution companies.

Similarly, EQM’s gathering system has multiple delivery interconnects to the Dominion Transmission system. Additionally, substantially all of the natural gas that is gathered by EQM’s gathering system that requires processing and treating is handled by Dominion Transmission.

USE OF PROCEEDS
EQT expects to net $230 million.  Proceeds are allocated as follows:
. to fund a cash distribution of approximately $182 million to EQT, in part for reimbursement of capital expenditures associated with our assets;

. to provide $14 million in working capital to replenish amounts distributed by Equitrans to EQT, in the form of trade and other accounts receivable, in connection with the closing of this offering;

. to pre-fund $32 million of maintenance capital expenditures, the majority of which is expected to be incurred over the next two years, related to two identified regulatory compliance initiatives; and

. pay $2 million in revolving credit facility origination fees.

FINANCIAL

EQT Midstream Partners, LP (EQM) EQM, C+, 7

Post IPO shares: 75mm

Natural gas transmission

12 mos ended March 2012

Est 12 mos ending June 2013
Pittsburgh, PA

2012

2012

IPO Mkt

Revenues ($mm)

$114

$124

Cap (mm)

EBITDA

$70

$73

$708

EBITDA % of revenue

61%

59%

@$20

Proforma distributions

$49.5

$49.5

Cash excess (shortfall)

-$4.7

$5.0

Valuation Ratios

IPO Mrkt

% Yield

Price /

% offered

Sept 2011fiscal year

Cap (mm)

BookValue

in IPO

EQT Midstream Partners, LP (EQM)

$708

7.0%

1.6

35%

Mid stream L.P.s

Mrkt

% Yield

Price-to-

Stock Price

StockPrice

YTD

SORTED BY YIELD

Cap (mm)

book ratio

Jan 1, 2012

June 20, 2012

change

Copano Energy LLC (CPNO)

$2,000

8.3%

2.3

$34.20

$27.73

-18.9%

Energy Transfer LP (ETP)

$10,390

8.0%

1.5

$45.85

$45.24

-1.3%

Inergy Midstrm (NRGM)*

$1,540

7.3%

2.4

$18.95

$20.76

9.6%

EQT Midstream Partners, LP (EQM)

$708

7.0%

1.6

DCP Midstream Prtnrs(DPM)

$2,030

6.7%

2.0

$47.47

$39.13

-17.6%

Kinder MorganEnrgy LP (KMP)

$25,810

6.3%

3.6

$84.95

$76.00

-10.5%

Source: Google finance

Average YTD change

-8%

* NRGM IPO’d Dec 15, 2011 at $17, below price range mid-point of $20
SCORECARD

Mgt

Market

Market Do-

Proprie-

Total

1-5, 5 is high

Growth

mination

tary

rating

20 is perfect

2

2

2

1

7

 

 

 

 

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