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At EQT, producer and pipelines diverge

EQT Corp.'s plan to separate its midstream and upstream businesses left some analysts scratching their heads, given that some driller-sponsored pipeline master limited partnerships continue to benefit from their symbiotic relationships with their parent oil and gas producers.

EQT, the nation's leading gas producer by volume, on Feb. 21 said the benefits of the old model for a combined EQT were "diminished," especially after its $6.7 billion acquisition of Rice Energy Inc. and Rice's midstream arm in 2017.

"I agree 100% that in the high-growth era and as the assets were being tested through new drilling and gathering systems ... we gained a lot of efficiencies and created lot of value through integration," President and CEO Steven Schlotterbeck said during a conference call. "But where we stand today, especially after the acquisition of Rice ... we can contract for midstream services in a more thoughtful and more proactive way than we could in the past. ... And on the midstream side, the system now, especially once combined with [Rice Midstream], has a very, I think, enviable position across that core of the southwest Marcellus."

MUFG Securities Americas Inc.'s Barrett Blaschke questioned Schlotterbeck's reasoning that EQT Midstream, spun off as a corporation rather than an MLP, would be better off without an upstream sponsor. Midstream peers like the Anadarko Petroleum Corp.-sponsored Western Gas Partners LP have prospered under their upstream parent companies. "I don't know that there are a lot of the advantages [to the spin-off]," CBRE Clarion Securities analyst Hinds Howard said in an interview. "Part of why you like EQT Midstream is because they have such a supportive sponsor, so if you're going to go away from that model, then EQT Midstream is sort of forced to fend for itself."

Despite the separation partly being the result of pressure from activist investors, the spin-off received a lukewarm reaction in the market as shares in EQT lost 3%, to $49.82, following the announcement. Prior to the announcement, the company's stock popped 10% on Feb. 15, when EQT announced that it would solve its lingering "sum-of-the-parts" problem by the end of February instead of March.

While executives on the Feb. 21 conference call were tight-lipped about how much cash would be generated for the EQT parent as it sells off and slims down, analysts estimated that up to $1 billion is headed EQT's way. Whatever the number, EQT CEO Steven Schlotterbeck promised to return most of that money to shareholders and not chase production growth on top of the 10% to 15% baked into the company's guidance.

"Bulls continued to point towards the discounted multiple at [the exploration and production arm] and that while energy spin-offs have a poor historical track record, the Midstream Co spin-co is a high-quality asset base that would have a strong investment case on its own," Wolfe Research analyst Josh Silverstein said in a Feb. 16 note to clients. "Bears pointed towards wide-spread ownership, execution risk, or numbers suggesting limited upside."

EQT said the separation process would involve a drop-down of EQT's midstream assets to EQT Midstream Partners LP, a merger between EQT Midstream and Rice Midstream Partners LP, and a sale of Rice Midstream's incentive distribution rights to EQT GP Holdings LP.

S&P Global Ratings placed EQT's corporate credit and senior unsecured debt ratings on CreditWatch with negative implications in light of the company's plan. If the transactions are completed, the rating agency expects to downgrade, limited to one notch, its BBB ratings on the nation's largest natural gas producer. One notch below BBB is BBB-, the lowest rating above speculative grade.