EQT Midstream Partners LP: This 8.3% Yield Looks Like an Opportunity
A High-Yield Stock to Think About
In a market where most companies pay less than four percent in dividends, an 8.3% yield certainly grabs income investors’ attention.
I’m looking at EQT Midstream Partners LP (NYSE:EQM), a master limited partnership (MLP) headquartered in Pittsburgh, Pennsylvania. It was created by EQT Corporation (NYSE:EQT) to own, operate, acquire, and develop midstream energy assets in the Appalachian Basin.
Now, some of you might be thinking, “Isn’t this just another beaten-down MLP from the energy sector?” On the surface, that seems to be the case, as EQM stock hasn’t been a hot commodity. Over the past 12 months, the unit price of this energy partnership tumbled nearly 30%.
We know that at a given dividend rate, a company’s dividend yield moves in the opposite direction to its stock price. So with the downturn in EQM stock, its yield has gone up.
However, a look at the details would show that EQM’s falling stock price was not the only reason behind its outsized distribution yield; the partnership is also actively raising its payout.
EQM Stock: Delivering Consistent Dividend Increases
When EQT Midstream Partners was formed in 2012, it had a quarterly distribution rate of $0.35 per unit. Today, the amount stands at $1.09 per unit. That’s an increase of 211%. (Source: “Distribution History,” EQT Midstream Partners LP, last accessed September 25, 2018.)
Since the beginning of 2013, EQT Midstream Partners has raised its payout every single quarter. In other words, when oil and gas prices crashed in the summer of 2014, the partnership was still increasing its cash distributions to unitholders every three months.
How was that possible? Well, EQT managed to deliver rising distributions despite the commodity price downturn because of its focus on providing midstream services.
Right now, EQT Midstream Partners operates through two business segments, Transmission and Storage, and Natural Gas Gathering. The partnership has operations in southwestern Pennsylvania and northern West Virginia. The assets are strategically located in the natural gas shale plays known as the Marcellus, Upper Devonian, and Utica Shales.
EQT Midstream Partners LP Runs a Rock-Solid Business
What makes EQT Midstream Partners really stand out is its stable business model. EQT provides most of its natural gas gathering, transmission, and storage services under long-term contracts with firm reservation and/or usage fees. In the second quarter of 2018, approximately 72% of the partnership’s total revenue came from firm reservation fees. (Source: “Investor Relations Presentation,” EQT Midstream Partners LP, last accessed September 25, 2018.)
At the end of the second quarter, the weighted average contract life on EQT’s transmission assets was 15 years.
It also helps that the partnership has a high-quality customer base. EQT Corporation, EQM stock’s creator, is by far the largest customer of the partnership. Moreover, the MLP generates approximately 80% of its revenue from investment-grade-rated counterparties.
With a fee-based model, long-term contracts, and high-quality customers, EQT Midstream Partners is well positioned to run a stable business through thick and thin.
Maintaining Strong Distribution Coverage
Still, as we do with all high yielders, we need to check EQM’s financials to see if the partnership can make enough money to cover the payout.
In the second quarter of 2018, EQT Midstream Partners generated $174.7 million in distributable cash flow. Given its total distributions of $201.8 million declared for the quarter, the partnership achieved a distribution coverage ratio of 0.87 times. (Source: “Q2 2018 Results Announced for EQT Midstream Partners and EQT GP Holdings,” EQT Midstream Partners LP, July 26, 2018.)
So, does that mean the partnership did not generate enough cash to meet its distribution obligations? Not really. You see, EQM’s distributions for the second quarter was based on the unit count after its acquisition of Rice Midstream Partners (RMP). However, the coverage ratio calculation did not include RMP’s distributable cash flow of $68.6 million. If we add RMP’s contribution to the calculation, we would arrive at a distribution coverage ratio of 1.21 times for the second quarter, which is safe.
EQM Stock: More Dividends Hikes on the Way
Going forward, EQT’s management is forecasting annual distribution per unit growth of 15% for the next several years. At the same time, the partnership expects to maintain a distribution coverage ratio of between 1.1 times to 1.2 times.
However you look at it, EQT Midstream Partners is a solid income play. Investors purchasing EQM stock today will likely collect a much higher yield on cost in the future than the current 8.3%.