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CNX Midstream's ambitious growth plan in Appalachian shales pleases Wall Street

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CNX Midstream's ambitious growth plan in Appalachian shales pleases Wall Street

At a time when lagging stock prices and structural changes are frustrating oil and gas pipeline master limited partnerships, newcomer CNX Midstream Partners LP's ambitious growth forecast and its potential to acquire more assets from sponsor CNX Resources Corp. have impressed equity analysts and investors.

During a March 13 presentation at CNX's Canonsburg, Pa., headquarters, the MLP's executives outlined a plan for 15% distribution growth through at least 2022 and said there is no need to tap capital markets over the next five years. Highlighting CNX Resources' February sale of the Shirley-Pennsboro gathering system to CNX Midstream, the executives also previewed a long list of drop-down inventory that the partnership may someday own.

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Nicholas DeIuliis, CNX Resources president and CEO, pointed to the relationship between CNX Midstream and its upstream parent company as the primary driver for the partnership.

"CNX [Midstream] has a highly incentivized sponsor," he said. "Not only does CNX need CNX [Midstream] to realize the value of upstream opportunity, but CNX is driven to make CNX [Midstream] successful in order to realize the value of the [general partner] and [limited partner] interest."

DeIuliis and his team convinced some equity analysts that CNX Midstream can compete effectively in the Utica and Marcellus shales.

"The stock clearly deserves to be in a peer group with other growthy gathering companies like [Antero Midstream Partners LP], [EQT Midstream Partners LP], and [Noble Midstream Partners LP]," Heikkinen Energy Advisors' David Amoss said in an email. "I would expect the stock will re-rate higher based on the new 2019-2020 growth outlook."

Janney Montgomery Scott LLC analyst Akil Marsh was similarly optimistic about CNX Midstream's prospects. He said the stock is undervalued in view of the partnership's "robust and achievable" EBITDA and distributable cash flow guidance. But he also said sooner is better for asset dropdowns from CNX Resources.

"Drops completed at a lower multiple and/or structured with a deferred acquisition payment would be accretive to CNX [Midstream] near term," Marsh wrote in a March 14 note to clients.

Wall Street was persuaded. CNX Midstream shares gained nearly 3% on its analyst day of March 13 and ended the market session at $18.85 per unit. On March 15, CNX Midstream units closed at $19.01.

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As more energy pipeline companies release their MLPs from required cash contributions to the general partner, there is also a trend of MLPs eliminating incentive distribution rights, or IDRs. CFO Don Rush said IDRs are not an issue for CNX Midstream yet.

"They are functioning exactly as designed for incentivizing a highly operationally and economically aligned sponsor to continue to grow distributions," he said. "CNX Midstream is still a young MLP, and from a distribution standpoint, IDRs represented only $1.56 million, or about 7% of total distributions in [the fourth quarter of 2017]."

IDRs have drawn scrutiny from investors focused on long-term financial health and stability. The payments can total 50% of a partnership's incremental quarterly cash distributions, which increases the cost of capital by depleting the pool of money available for reinvesting in the business.