ETRN - Equitrans Midstream And The Most Valuable Pipeline

2023-06-12 08:30:00 ET

Summary

• Mountain Valley Pipeline completion by end of year.
• Current state of permitting makes Equitrans even more valuable to own.
• Equitrans' projects forthcoming will substantially increase revenue.
• Atlantic Coast Pipeline was killed and lost $8B.
• MVP Southgate could reap Atlantic Coastline profits without loss.

In my last article on Equitrans Midstream (ETRN), Mountain Valley Pipeline's completion looked gloomy, but there was still a chance; now that chance has become a reality, and MVP will be completed by year end due to its inclusion in the Fiscal Responsibility Act of 2023. It means investors who bought Equitrans before the debt ceiling deal was struck are doing well and collecting around 12%, and holders from higher stakes now have a chance at redemption. With this stock, I plan on holding longterm, for it is very valuable in my opinion.

Equitrans Midstream is one of the largest natural gas gatherers in the US; they get their natural gas from the Appalachian basin which represents 37% of the US LNG resources. Companies like EQT Corporation ( EQT ) drill for the gas and pump it through Equitrans Midstream's interstate pipelines. Companies like Dominion ( D ), Duke ( DUK ), NextEra Energy ( NEE ) and others, make firm contracts with Equitrans for that natural gas. In terms of interstate pipeline companies, Equitrans Midstream's MVP has shipping contracts for 20-years and a useful life for ~50-years plus. The company's annual dividend in 2019 was $1.76 before the court games started in an attempt to kill MVP; other pipeline projects like the Atlantic Coast Pipeline or the Keystone XL Pipeline were not as fortunate.

Current state of permitting makes MVP more valuable.

After $6.6B in investment with a ~$3B overrun, a 10 year project timeline that is 5 years overdue , MVP will hold the title as the most expensive US pipeline in history, having gone through the most extensive permitting process ever with issuances and revocations multiple times by the 4th Circuit Court. In reality, MVP is the poster child for permitting reform. As Equitrans CEO Thomas Karam stated in the latest 8K , " Absent a more certain regulatory review and approval process ", our country is impeding the ability of companies to invest capital in infrastructure. So, what value does that put on MVP considering it could be the last major pipeline project in the country until something is done about the never-ending permitting merry-go-round? In my opinion, this makes Equitrans much more valuable considering MVP is going to be a 2.0 bcf/d natural gas pipeline, and millions of people have fled to the Southeast which is the targeted region for the gas.

Luckily for Equitrans Midstream investors, Congress strategically delayed the debt ceiling bill aka Fiscal Responsibility Act; by late Thursday night, just four days before a historic US default, the bill passed at about 10pm in the Senate. There was no time for amendments to be filed which would have forced the bill back to the House. There were a number of amendments that were attempted, but the majority of Senators didn't want their name associated with causing the default, plus if you watched the voting video, it was clear that by Thursday evening, it was a done deal and the Senators were preparing to ditch DC for a long weekend; Schumer's final announcement was mostly to an empty chamber. Senator Tim Kaine of Virginia had wanted MVP removed, as did Senators Bernie Sanders of Vermont and Elizabeth Warren from Massachusetts, but they ran out of time. Biden had stalled purposefully, jetting to Asia, then coming back to be able to sign it in the nick of time on June 3rd; the strategy worked, otherwise MVP might still be in a permitting quagmire.

MVP is Democrat Joe Manchin's pork that he is bringing back to his State of West Virginia going into the 2024 election against Republican Jim Justice who already has a sizable lead; Manchin's Most Valuable Pipeline could get him reelected with the thousands of good-paying jobs the project will create. Manchin was owed some favors from the Biden Whitehouse for past deeds — his vote for Ketanji Jackson on the Supreme Court and the Inflation Reduction Act of 2022. The fact that Biden's Energy Secretary Granholm specifically penned a letter to FERC supporting MVP signaled that Biden was returning the favor. This really might have been MVP's last chance to become reality, and the ~$4 share price was indicative of the company's predicament.

Equitrans projects forthcoming will increase revenue.

With MVP slated for completion, investors should now know about other Equitrans Midstream projects in the shadows.

1) The Hammerhead pipeline has already been built by Equitrans Midstream for $555mm and is ready for operation. The contractual commitment begins when MVP is placed in service. Hammerhead was " primarily designed to connect natural gas produced in Pennsylvania and West Virginia to the Mountain Valley Pipeline ((MVP))". This pipeline will generate 1.6 bcf/d of natural gas from the Marcellus and Utica Shales in southwestern Pennsylvania, eastern Ohio, and northern West Virginia.

2) The MVP Southgate project is being built to provide low-cost supply access to natural gas produced in the Marcellus and Utica shale regions for delivery to Dominion Energy ( D ) North Carolina customers, as well as existing and new markets in southern Virginia and central North Carolina. This pipeline will generate 0.3 bcf/d of natural gas. The Southgate project needs MVP to be completed in order to proceed, so the recent news definitely helps that project gain momentum.

3) The Ohio Valley Connector Expansion project (OVCX) is designed to transport natural gas from the central Appalachian Basin into Equitrans Midstream's interstate pipeline. OVCX is in the approval phase and is expected to be online in the first half of 2024; it will transport natural gas from Equitrans' Mainline and Sunrise Transmission Systems and other gathering points to interconnections with interstate pipelines operated by Rover Pipeline LLC and Rockies Express Pipeline ((REX)). REX is owned by Tallgrass Development, Phillips 66 ( PSX ) and Sempra U.S. Gas & Power. Rover is owned by Energy Transfer Partners ( ET ). This pipeline will generate 0.35 bcf/d of natural gas.

MVP Southgate redemption for Atlantic Coast Pipeline partners.

Consider that investors lost $8B in the Atlantic Coast Pipeline debacle, and it was backed by Dominion Energy, Duke Energy, Piedmont Natural Gas, and Southern Company ( SO ). If you look at the map for the proposed pipeline, it traversed Virginia and went into North Carolina; it really isn't that much different from MVP Southgate, and some of the players are the same, with Dominion Energy being one of the prime customers working with Equitrans on the project’s design, scope and timing; so, the project really is a resurrection of parts of the Atlantic Coast Pipeline, and if that was valued at $5b, then when MVP Southgate completes, what will that make Equitrans stock worth?

If you consider the side-by-side maps above of MVP Southgate and Atlantic Coast Pipeline which had an extension to the coast allowing export capability, MVP could eventually assume that functionality. Even though MVP Southgate does not have the Federal Section 3 authorization needed to be able to export natural gas, with a natural gas-friendly Whitehouse administration, the possibility is not out of the question. Furthermore, while Atlantic Coast Pipeline was still in the running before being shot down by the 4th Circuit Court, there was opposition stating that the MVP Southgate was not needed, but now it is. Since MVP will make it across the Appalachian Trail in the Jefferson National Forest, it would only make sense for the pipeline to assume that responsibility. This is the real hidden value that investors inherit by getting lucky in this midnight-hour debt deal .

In December, 2022, the EIA stated that the US was the number one exporter of natural gas edging out Qatar and Australia . The Nord Stream 1 & 2 natural gas pipelines were destroyed in September of that same year, so this event does increase MVP's value. In 2021, the US exported ~47% of its natural gas to Europe and the UK. In 2022, it was 64% or a 36% increase, and last winter was mild. Investors should remember that " international natural gas and LNG prices hit record highs in the last quarter of 2021 and first half of 2022 ". There's no telling what a tight supply would do to natural gas pricing this coming winter with demand increasing .

Consider that in the past year, Equitrans has delivered the following results with almost $1.4B in revenue.

• Q1-2022 ~$343mm revenue, $0.14

• Q2-2022 ~$329mm revenue, $0.11

• Q3-2022 ~$332mm revenue, $0.09

• Q4-2022 ~$355mm revenue, $0.13

Without MVP, Equitrans is still a 5.0 bcf/d natural gas and water business. Equitrans spent ~$400mm last year, so EBITDA came in just over $1B. Considering the additions of MVP (2.0 bcf/d), MVP Southgate (0.350 bcf/d), MVP Hammerhead (0.3 bcf/d), and OVCX at 0.35 bcf/d), that increases Equitrans current capacity by about 60%. Current estimates are that MVP and other additions will add about $300mm of EBITDA when they are fully operational, so conservatively figure EBITDA at around $1.3B.

From that EBITDA addition, expect expenses of around $300mm a year including CAPEX, so they'll have DCF of around $1B. Using those numbers, the dividend at $0.60 cents is about $260mm or over 4X coverage. However, debt will still be high at around 6X (EBITDA of $1.3B and debt of $7.5B). The goal is 4X, so management needs to reduce by about $2B. My guess is they rapidly pay off debt to hit the 4X number before moving the dividend higher. If they do this for 2024-25, then in 2026 they'll be golden. At that point, Equitrans could triple the dividend and still have 1.3X coverage. With debt at 4X and a dividend at 1.3X, the share price will likely be around $20 with an 8% dividend.

The Q2 earnings call should be exciting. The management can finally hold a call with excellent news to report and great expectations. The one-time " $4.1 million of operating expenses related to the Rager Mountain storage incident " will not affect the bottom line either. Besides being the most valuable US pipeline ever built, the " MVP project has almost certainly gone through more environmental review and scrutiny than any natural gas pipeline project in U.S. history ". Investors should be very pleased with their investment's current status and future.

I only invest in stocks I truly believe in and present a logical thesis for bloggers to comment on. Seeking Alpha blogs are where the truth is found. At ~$9 a share, currently you have to remember how low ETRN was just a couple months ago. However, in 2018 Equitrans was at ~$22 a share. Goldman Sachs had a Sell rating on this stock. There are other dividend stocks out there paying a lot more than 6%, but it's all in the value in my opinion. With MVP and the projects forthcoming, I think Equitrans is a seriously valuable stock that will double or triple in value in years to come, as well as increase the dividend back to where it belongs once some of that debt is taken care of. As always, do your own due diligence, and good luck!

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