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Will EQT's Spin-Off of Midstream Businesses Prove Beneficial?

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EQT Corporation’s (EQT - Free Report) board of directors has finally succumbed to months of pressure from investors and agreed to separate the company's upstream and midstream businesses. It will form an independent publicly traded company (NewCo), whose operations will focus on the midstream businesses of EQT. Following the news of spin-off, the stock declined 3.1%, making the stock fall 11.1% in the last 30-day time period.

Notably, since the $6.7 billion Rice Energy acquisition by EQT, activist Jana Partners and hedge funds D.E. Shaw & Co had pushed for the separation, as they thought it would bring better returns for shareholders.

Details

The deal is devised to be tax-free for the company's shareholders, who will retain their EQT shares and receive a pro-rata share of the NewCo.

Moreover, midstream assets of the company will drop down to its master limited partnership, EQT Midstream, which will then merge with the Rice Midstream Partners, the master limited partnership of Rice. The merged entity, NewCo, will focus on midstream businesses. The deal is expected to be over by the third quarter of 2018.  The Senior Vice President of EQT, Jerry Ashcroft, is expected to continue as the CEO of the newly independent company.

How will it Help EQT?

The spin-off is expected to enable the company to concentrate on its upstream assets, and exploration and production business. The deal will leave EQT with 680,000 core Marcellus acres and 65,000 Ohio Utica acres. With the shale production to ramp up in the coming quarters, this move can help the company benefit largely through efficient allocation of capital, compared with the previous company set-up that constrained the company's returns in the recent years.

Additionally, $2.3-$2.8 billion of free cash flow over the 2019-2023 time frame is expected to trickle down from the move, which forecasts 10-15% annual production growth. This is much needed for the company as its free cash flow generating ability did not work much in the last few years, staying in the negative region for most of the quarters.

Price Performance

EQT has lost 17.7% in the last year compared with 15.1% fall of its industry.

About EQT Corporation

Based in Pittsburgh, PA, EQT Corporation is an integrated energy company. It focuses on natural gas production, gathering and transmission in the Appalachian region. Notably, the company is one of the largest natural gas producers in the United States.

Zacks Rank and Stocks to Consider

EQT carries a Zacks Rank #3 (Hold).

A few better-ranked stocks in the oil and energy sector are Cabot Oil & Gas Corporation , Continental Resources, Inc. and Pioneer Natural Resources Company (PXD - Free Report) .  All these companies sport a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

Houston, TX-based Cabot is an independent energy company. Its sales for the fourth quarter of 2017 are expected to increase 34.7% year over year. For 2017, the bottom line is expected to be up 347.6%.

Based in Oklahoma City, OK, Continental Resourcesis an upstream energy company. Its revenues for fourth-quarter 2017 are anticipated to improve 73.1% from the prior-year quarter. In the last four quarters, the company witnessed a positive average earnings surprise of 69.5%.

Irving, TX-based Pioneer Natural Resources is an independent oil and gas exploration and production company. Its revenues for first-quarter 2018 are expected to improve 22.8% from the year-ago quarter. For 2018, the bottom line is anticipated to be up 163.4%.

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