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EQM betting on continued Appalachian gas growth with $1B bolt-on

EQM Midstream Partners LP's planned $1.03 billion acquisition of gas gathering systems in the Appalachian Basin represents a departure from broader sector trends toward private equity investment in oil and gas assets, and some analysts are skeptical of whether EQM is getting its money's worth.

EQM's decision to buy a 60% stake in Eureka Midstream Holdings LLC and 100% of Hornet Midstream Holdings LLC from a fund managed by Morgan Stanley Infrastructure Partners "goes against the sector narrative" of private equity firms gobbling up public assets and "could be the beginning of a new trend," analysts at Credit Suisse wrote in a March 14 note to clients.

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With private capital focused on the oil-rich Permian Basin in Texas and New Mexico, Appalachian natural gas producers and pipeline companies have been spared the influx of competition. Activity in the Permian ramped up in 2018 with deals including Targa Resources Corp.'s joint venture with Stonepeak Infrastructure Partners-affiliated investment vehicles.

Hinds Howard, a master limited partnership expert at CBRE Clarion Securities, sees the deal as more of a one-off than a trendsetter.

"That Northeast world is harder for private equity to break into ... so I'd look at it as a one off," Howard said.

Eureka Midstream is a 190-mile gathering header pipeline system in Ohio and West Virginia, serving production at the Utica and Marcellus shale plays. Hornet Midstream is a 15-mile, high-pressure gathering system in West Virginia, which has a connection to the Eureka system. The assets averaged about 1.6 Bcf/d of gathered volume in the fourth quarter of 2018 and are supported by 200,000 acres of dedications and minimum volume commitments of 0.8 Bcf/d, which are set to increase to 1.3 Bcf/d by 2021.

"There are two main hubs where EQM assets and the Eureka system meet: Clarington, Ohio, and Mobley, W.V. These two points are high-liquidity areas in the basin and provide access to major takeaway pipelines out of the basin, including our own Mountain Valley Pipeline," EQM Chairman, President and CEO Thomas Karam said during a March 14 conference call.

Even with the minimum volume commitments and connectivity to takeaway capacity, Wells Fargo analysts struck a less optimistic tone.

"EQM is paying a full multiple for Northeast gathering assets, and is increasing its gathering asset footprint [which has a] lower multiple business than pipelines," they wrote in a March 14 note to clients. "While management is forecasting 20% annual EBITDA growth for several years, this forecast has obvious execution risk and is likely tied to producer activity behind the systems, which may or may not play out."

Investors had a more neutral reaction to the news. EQM's stock price was trading down less than 1% at $43.05 per unit as of 2:40 p.m. ET on March 14.