EQT Midstream Partners LP said late Wednesday it would acquire the Jupiter natural gas gathering system in southwest Pennsylvania from affiliate EQT Corp. for a larger-than-expected purchase price of $1.18 billion.
EQT Midstream plans to pay $1.12 billion in cash and offer another $59 million in common and general partner units to EQT Corp. It will partly fund the cash purchase by offering an additional 8.7 million common units on the New York Stock Exchange.
The Jupiter system was constructed to gather EQT Corp.'s Marcellus Shale production in Greene and Washington counties. The acquisition gives EQT Midstream 35 miles of additional gathering lines and two compressor stations, with 970 MMcf/d of capacity that will be expanded by the partnership this year and next.
Since it spun-off EQT Midstream in 2012 (see Shale Daily, Feb. 14, 2012; Dec. 12, 2011) in an attempt to balance its upstream and midstream assets, EQT has continued to drop down its midstream assets to the partnership. Last July, EQT Midstream agreed to pay up to $650 million to EQT Corp. for Sunrise Partners LP (see Shale Daily, July 17, 2013), which operated a 700-mile interstate pipeline system and more than 2,000 miles of low-pressure gathering lines.
Financial analysts had expected EQT Corp. to sell more midstream assets this year (see Shale Daily, April 25; Feb. 13, 2014) but were surprised to learn that the Jupiter system fetched more than $1 billion.
"In our mid-February note, we had estimated Jupiter could be worth more than $1 billion, but we think the price exceeded many investor's expectations," BMO Capital Markets analyst Phillip Jungwirth wrote in a note to clients on Thursday. "Also, the deal appears to be significantly accretive to [EQT Midstream's] distributable cash flow per unit, even with a nearly all-equity financing."
Volumes and operating income have steadily risen for EQT Midstream since it was created, and its latest acquisition was billed as a win-win for both sides by the marketplace. EQT Corp. will essentially retain control of the system with a 10-year firm capacity reservation commitment, and it also said it would repurchase up to one million shares with proceeds from the sale.
At the end of the first quarter, EQT Corp. had 206 Marcellus and nine Upper Devonian shale wells drilled across 48,000 net acres in the Jupiter service area. Average daily gathered volumes there in the first quarter were 595 MMcf/d. Proceeds from the sale are also expected to more than fund its $475 million in midstream expenditures this year.
EQT Midstream said it plans to spend $182 million to make upgrades to the system by adding compression capacity and installing more gathering lines that will give Jupiter another 550 MMcf/d of capacity by 2015. Despite those investments, EQT Midstream said its earnings on the system would far exceed the costs to operate it.
EQT Corp. still owns thousands of miles of gathering lines, and management has said in the past that it will continue dropping down those assets to EQT Midstream as it sees fit.