• EQT Clears Its Thicket of Tickers, and It’s a Good Thing: Gadfly

    EQT Corp. has mercifully announced it is embracing the simple life. To get a sense of just how merciful an outcome this is, here’s the CEO describing the mechanics of the spin-off of its midstream business announced Wednesday morning:

    This NewCo will own the midstream interests held by EQT Corporation. Prior to the separation, EQT intends to pursue the merger of EQM with RMP and the drop-down of the EQT-owned midstream assets to EQM, through accretive transactions. In addition, EQT plans to pursue the sale of the RMP incentive distribution rights to EQGP.

    Got that?

    Besides alleviating a headache, separating EQT’s core exploration and production business from its pipelines should provide another merciful outcome: a higher multiple.

    Recall that EQT’s poorly pitched $8.2 billion acquisition last year of fellow gas-producer Rice Energy Inc. attracted the less-than-tender mercies of activists. Among their demands was that EQT clean up its mixed business model -- something very much in fashion in E&P circles these days.

    Backing out the value of EQT’s minorities, stakes in various listed midstream businesses, net debt and, say, $500 million for those incentive distribution rights mentioned implies an underlying enterprise value for the E&P business of perhaps $12 billion (the consolidated figure is about double that).

    The consensus estimate for EQT’s Ebitda in 2018 is $3.6 billion, according to data compiled by Bloomberg. Backing out the midstream portion implies underlying Ebitda of $2.7 billion. This results in a pro-forma multiple for the E&P business of about 4.6 times.

    Here’s how that compares to the current multiple and peers:

    The implication is that EQT’s upstream business could trade up to bring its multiple more in-line with its rivals. The company’s simultaneous release of guidance calling for E&P free cash flow of $2.3-$2.8 billion between 2019 and 2013 -- equivalent to about 40 percent of the implied market capitalization of the standalone business -- supports a re-rating.

    Put its pro-forma Ebitda on a multiple of, say, 5.5 times, and it implies an extra $9 or $10 per share of value in the offing. It will likely take more clarity on the exact plans for NewCo for the market to grant any significant part of that. But the very act of clearing the thicket of tickers around EQT is a good start.

    This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

    Liam Denning is a Bloomberg Gadfly columnist covering energy, mining and commodities. He previously was the editor of the Wall Street Journal’s “Heard on the Street” column. Before that, he wrote for the Financial Times’ Lex column. He has also worked as an investment banker and consultant.

    To contact the author of this story: Liam Denning in New York at ldenning1@bloomberg.net.

    To contact the editor responsible for this story: Mark Gongloff at mgongloff1@bloomberg.net.

    ©2018 Bloomberg L.P.

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