What happened
Shares of EQT Corporation (EQT -0.44%) are down 46% on Nov. 13, as of 2:39 p.m. EST. Yet despite this huge drop, investors in the company shouldn't really be concerned. That's because today's big decline is the product of EQT's spinoff of the midstream assets it owned into a separate public company, Equitrans Midstream Corp. (NYSE:ETRN), and existing EQT shareholders -- as of Nov. 1 -- were awarded with what amounts to an offsetting amount of equity in the new company.
So what
To be specific, EQT shareholders got 80.1% of Equitrans Midstream, paid in a ratio of 0.8 Equitrans shares for each single share of EQT owned as of Nov. 1. Let's do some math to figure out how it all adds up.
Image source: Getty Images.
At current prices, Equitrans Midstream shares trade for $20.61 each. So 0.8 shares would be worth $16.49, which offsets the vast majority of the $16.72-per-share decline in EQT's share price today.
In other words, the newly awarded equity in Equitrans Midstream offsets almost all of the drop in EQT's share price. Adjusting for the Equitrans shares, EQT's stock price is only down about 0.6% today.
If you're an EQT shareholder who hasn't followed the company's plans to split its business apart, the short version is that you now own a stake in two separate and very different businesses.
EQT is now primarily a natural gas producer -- the largest in the U.S. now -- though it does retain a 19.9% stake in Equitrans, which management indicates it will likely sell off at some point to help improve its balance sheet. But going forward, its business results will be entirely predicated on its natural gas production and its ability to keep production costs low. Unfortunately, there were some signs in its most-recent earnings that expenses are rising, particularly service costs and other things related to its so-called "learning curve" as the company adopts new drilling techniques.
Equitrans is a midstream company that focuses on gathering, transporting, and storing natural gas and natural gas liquids in the Appalachian Basin. Its structure is also made up of a controlling interest in EQGP Holdings LP (NYSE: EQGP) and a 12.7% limited-partner interest in EQM Midstream Partners LP (EQM).
Management expects this structure to generate substantial cash flows that will support a dividend between $1.70 and $1.90 per share in 2019, which works out to an 8% yield at recent prices. That's a very high yield, but management says it can do even better, with a stated goal of growing the payout 8% to 10% annually.
Now what
The summary above only scratches the surface of these two separate businesses, but I think between the two, Equitrans Midstream is an interesting investment to consider. It's a standard corporation, while EQGP Holdings and EQM Midstream are limited partnerships, bringing along a litany of potential tax consequences that could make them less than ideal depending on where you are investing, so forming this new corporate entity allows more kinds of investors to participate in the income these midstream assets generate.
As to EQT, I'm less convinced. Natural gas prices have been challenged for years, and its prospects will be more a product of commodity prices than anything else, even if it's able to continually drive its costs down and production up. Frankly, it's hard to be a pure-play independent producer, and I'm not sold on EQT as a stand-alone producer any more than I am most others.
Besides, there are other energy stocks that are far-better buys right now.
