ETRN - Equitrans Midstream A Political Football

2023-03-31 09:00:00 ET

Summary

• The Mountain Valley Pipeline is going for a 4th try, which may be different this time.
• Winter is coming, Europe needs LNG, so does the Southeast.
• Goldman Sachs says Sell, it may be time to Buy.
• If MVP is completed this summer as planned, Equitrans shares could spike higher.

A prime example of the destruction of our country's infrastructure is the story of Equitrans Midstream Corporation ( ETRN ) and its 94% complete Mountain Valley Pipeline . It has become one of the biggest political footballs in our country, and as a result, is one of the most expensive pipeline projects ever. The company has received all the necessary permits three times now to finish MVP, only to have them revoked by the same three Obama-Clinton-appointed judges at the 4th District Circuit Court in Virginia. Recently, Goldman Sachs downgraded Equitrans Midstream due to the MVP debacle causing the stock to deflate to the low $5's. The old saying, " three strikes and you're out ", may hold some weight, but this company is going for a fourth.

I believe this stock offers an incredible opportunity for investors. A lot of things have happened in the past few years; moods are changing across the country because the most important issue people are facing these days is the economy not climate change. At the same time, home energy prices have more than doubled since last year, so many are starting to question the narrative and realize that Donald Trump's all-energy policy and US energy independence weren't such bad things after all. The US needs low-cost energy, and MVP will provide that.

The Mountain Valley Pipeline will transport liquid natural gas (LNG) from remote Appalachia to the Southeast. LNG is the cleanest-burning fossil fuel. Transportation by pipeline is the safest method, especially considering the recent Chernobyl-like tragedy in East Palestine, Ohio . Sadly, MVP has been a political football since 2018, and as a result, is almost twice over-budget and 5-years overdue.

When the Biden administration was installed in the White House in 2020, they immediately killed the Keystone Pipeline in favor of the Nord Stream 2 pipeline; it sure is odd that the Nord Stream 2 pipeline was destroyed most recently, so where is the LNG going to come from for Europe? After the 2020 election, one of the biggest pipeline projects in the country, the Mountain Valley Pipeline, was halted after being fast-tracked under President Trump. One of the main adversaries of MVP is the Sierra Club. If you follow the money, you'll find that millions of dollars from Russian state-owned oil and gas companies flowed into the Sierra Club's coffers, so it only makes sense that they would want to shut down America's energy infrastructure.

The MVP project was supposed to have been completed in 2018 at a cost of $3.7B. Since then, it has gone through multiple permitting hurdles and ballooned to a ~$6.6B cost, making it the most expensive and possibly the last pipeline project in our country, especially if permitting is not reformed. In July 2018, the 4th District Circuit Court sided with the Sierra Club and rejected permits from the US Forest Service and Bureau of Land Management for the national forest crossing, thereby halting MVP. In early 2022, the Court again revoked permits for MVP, halting the project.

Senator Joe Manchin, Democrat, from West Virginia, touted that MVP was essential for the US economy, but without favors performed, backroom deals cannot be made. The first favor which raised eyebrows was when Manchin played identity politics and voted for Ketanji Jackson for the Supreme Court. The second was Manchin's voting for the Big Green " Build Back Better " aka Inflation Reduction Act of 2022; the fast-tracking of the Mission Valley Pipeline had been added to the Act, but as payback from the RINO's for Manchin's voting for the IRA, the Senate stopped Manchin's addition . So, MVP was pushed into the NDAA for 2023 , but it was blocked again by the same politicians even though it had approval from Schumer, Pelosi, and the Biden White House.

In all the political cards played, Senator Joe Manchin is still owed a favor. The House is Republican controlled now, something it was not in the recent past. The Senate is narrowly controlled by Democrats with Kamala Harris being the tie-breaker. However, that control is in jeopardy; Kristin Cinema left the Democrat party becoming an Independent in December, and although Joe Manchin is a Democrat, he needs to be reelected in 2024 , so MVP is definitely pork for his State that he needs.

The latest push to fast-track MVP came in the form of the Lower Energy Costs Act or HR-1 which was introduced last week in the Republican-controlled House. Notice it is the first bill on the dock. The Democrats balk that this bill will not pass the Senate, but that remains to be seen; McConnell and his band of RINO's should be for it this time since there is clearly no conflict of interest as there was with the IRA or NDAA. The fact that the Biden White House, along with Pelosi and Schumer, were willing to make the side-deal with Manchin to have MVP fast-tracked means that a veto from the White House is not a definite either.

Even if a glorious Act does not give MVP the green light, there is always the judicial. From the permitting sidelines, MVP got its revised Biological Opinion from the US Fish & Wildlife Service (USFWS) on 2/28 just as the CEO had promised; this opinion will be instrumental in the US Army Corps of Engineers water-crossing permit due by the end of April. Then, a final permit is expected for the forest crossing from the Forest Service and Bureau of Land Management by 5/17. CEO Thomas Karam was confident this past earnings call that all of the permits would be issued and that MVP would have everything the 4th District Circuit Court had wanted. So, if a backroom deal has been struck since Manchin is owed a favor, and his seat is needed to retain a Democrat majority in the Senate, then maybe the Obama-Clinton-appointed judges will give it a pass. For MVP, this summer will be a critical time, and investors can keep track of the latest on MVP here .

Winter is coming. Europe has used up its stockpiles of LNG it got from Russia. Saudi Arabia has made peace with Iran, brokered by China. China is allying with Russia. Saudi Arabia and Mexico are entering BRICS. China is buying Brazil . The dollar is in jeopardy; the war in Ukraine may really be about knocking out the ruble and saving the dollar. These geopolitical events make American infrastructure projects like MVP even more valuable, considering how our status on the world stage has eroded in the past two years.

Due to the pandemic, millions of Americans moved; the Southeast has been inundated with newcomers, with over 2 million to Florida alone. The Southeast is the target market for MVP, so it makes even more sense now to finish the project. However, if MVP's LNG can get to an export terminal such as Freeport , Texas, or Cove Point , Maryland, it may well end up in Europe. With plans underway to build a third LNG export plant on the East Coast near Philadelphia, you have to wonder where all the LNG will be coming from to export.

From Equitrans Midstream's ETRN)%20Q4%202022%20Earnings%20Call%20Transcript" > latest earnings call , the CEO stated " We also reported full year net cash provided by operating activities of ~$846 million and free cash flow of $380 million. '' With the dividend being ~$260mm, that gives ~1.5x coverage. However, from the previous SA article , some see coverage this way: " As a result, they only generated $180.6mm of free cash flow during 2022, which fell short of funding their accompanying dividend payments of $259.7mm, thereby resulting in very weak coverage of 69.57%. '' The difference here is the author included the one-time $200mm payment to EQT with their free cashflow number.

In addition, Equitrans spent around $200mm on being in a holding pattern with MVP. If they tossed out the MVP holding cost and EQT's payment, free cashflow would be ~$580mm or 2.3X. So, if MVP goes away, they'll be fine, and if it completes, they'll be real fine; they just need to get out of this holding pattern. Consider that their debt level is around $6.9B, or about 6X EBITDA. A solid pipeline company would be at 5 or less, preferably 4. The best solution is that MVP gets completed and EBITDA jumps from $1.1B to $1.5B and debt drops from 6- to 4.3-X immediately. With debt at 4.3X and dividend coverage at 2.3X, it would be golden, and the share price could jump dramatically.

Per Fintel file date 01/25, Goldman Sachs Small Cap Value Fund Institutional opened a new ETRN position with 1,310,639 shares. Then, in a complete reversal on 2/1, Goldman Sachs downgraded Equitrans Midstream to a Sell due to MVP. That seemed kind of strange, but it caused the stock to deflate to a new 52-week low. If MVP is completed this summer as planned, investors could see a double or triple bagger at the current share price.

Also consider that some Equitrans Midstream management have recently bought shares out of their own pockets - General Counsel, Stephen Moore on 3/14 and CFO, Kirk Oliver on 3/16 .

In addition, the Ohio Valley Connector project got FERC approval ; this will allow Equitrans Midstream to flow an extra 350 MMcf/d (million cubic feet per day) of natural gas and generate more revenue for the company.

In my opinion, our country must have an all-energy approach and not an all-or-nothing desperate ultimatum as the ESG movement is trying to muscle in. Moving towards renewable energy is a good thing, but like China's Premier Xi Jinping stated , it should be done gradually. If China has that stance, then the West should, too. Equitrans Midstream is caught in the middle here and has truly been a political football. Let's see what happens to MVP this summer, but regardless, Equitrans Midstream will continue providing both water and LNG to customers with its existing pipelines. If you believe in American infrastructure, then ETRN might be a good stock to invest in now, collect the 11.6% dividend yield, and patiently wait for the outcome of MVP. Please do your own due diligence, and good luck!

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