EQT Midstream Partners: A Rare Find in the Oil and Gas Industry
There is no other way to put it; the past year-and-a-half has been terrible for the energy industry. Many companies are deep in the doldrums, and some are even on the verge of bankruptcy. This top dividend stock, on the other hand, has not only survived, but has also been increasing its payout to shareholders.
The company I’m talking about is EQT Midstream Partners LP (NYSE:EQM).
EQT Midstream Partners is a limited partnership formed by EQT Corporation (NYSE:EQT) to own, operate, acquire, and develop midstream assets in the Appalachian Basin. It provides natural gas transmission, storage, and gathering services in southwestern Pennsylvania and northern West Virginia.
EQT Midstream Partners is a master limited partnership (MLP). For those not in the know, MLPs get special tax treatment. As long as they generate at least 90% of their income through activities involving the transportation of commodities in the United States, MLPs don’t have to pay a penny in corporate taxes.
But there are many MLPs on the market, so what makes EQM stock special?
Well, all you need to do is take a look at the partnership’s distribution history. Quite a few companies in the sector have slashed their dividends due to the low-oil-price environment. Not at EQM, though. This MLP has been raising its payout every quarter for more than three years, and its quarterly distribution rate has almost doubled during this period.
The latest distribution hike came in October, when EQT Midstream Partners announced a quarterly cash distribution of $0.815 per unit, representing a 21% increase compared to the distribution in the year-ago period. (Source: “EQT Midstream Partners and EQT GP Holdings Increase Quarterly Distributions,” EQT Midstream Partners LP, October 25, 2016.)
At the current price, EQM stock has an annual dividend yield of 4.56%.
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This Top Dividend Stock Has Solid Financials
The reason behind the partnership’s ability to raise its payout is the nature of its business. As mentioned above, EQT Midstream Partners provides natural gas transmission, storage, and gathering services. It also owns 700 miles and operates another 200 miles of interstate pipelines and around 1,600 miles of high-pressure and low-pressure gathering lines.
The key to note here is that a large part of EQT Midstream Partners’ services are provided under contracts with long-term, firm reservation, and/or usage fees. This would add stability to MLP’s cash flows and limit its direct exposure to commodity prices.
If you are wondering whether the partnership is growing its payout too aggressively, a look at its financials should be reassuring. EQT Midstream Partners reported third-quarter results in October. For the quarter, the company generated $120.7 million of adjusted operating income, representing an 18% increase year-over-year. Its distributable cash flow was $125.7 million, providing 1.36 times coverage for the partnership’s total distributions declared for the quarter. (Source: “Q3 2016 Results Announced for EQT Midstream Partners and EQT GP Holdings,” EQT Midstream Partners LP, October 27, 2016.)
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Having a 1.36 times distribution coverage ratio is a good thing for dividend investors, as it leaves a margin for error and the potential for future dividend hikes.
Going forward, there is good news. EQT Midstream Partners has raised its adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) guidance for full-year 2016 from $505.0–$510.0 million to $510.0–$515.0 million. Its projected distributable cash flow for the year has also been raised from a range of $495.0–$505.0 million to $515.0–$520.0 million.
In a word, EQT Midstream Partners operates toll roads in the energy industry. It has the ingredients to be a top dividend stock and is worth checking out for investors who want to bump up the yield of their dividend portfolios.