Steel City Capital is Hopeful About Equitrans Midstream Corporation (ETRN)

Steel City Capital, an investment management company, released its second quarter 2022 investor letter. A copy of the same can be downloaded here. The fund declined 11.2% net of fees in the second quarter, compared to a decline of 16.4% in the S&P 500 Index and 17.5% in the Russell 2000 Index. Market conditions like inflation, rate hikes, and fears of a recession affected the fund’s performance in the first half of the year. For more information on the fund’s top picks in 2022, please check its top five holdings.

Steel City Capital mentioned Equitrans Midstream Corporation (NYSE:ETRN) in the letter and discussed its views about the company. Equitrans Midstream Corporation (NYSE:ETRN), headquartered in Canonsburg, Pennsylvania, is an energy company that engages in the business of natural gas. The stock of Equitrans Midstream Corporation (NYSE:ETRN) closed at $9.42 per share on August 15, 2022. One-month return of Equitrans Midstream Corporation (NYSE:ETRN) was 38.91%, while its shares gained 14.93% of their value over the last 52 weeks. Equitrans Midstream Corporation (NYSE:ETRN) has a market capitalization of $4.077 billion.

Here’s what Steel City Capital specifically said about Equitrans Midstream Corporation (NYSE:ETRN) in its Q2 2022 investor letter:

“Equitrans Midstream Corporation (NYSE:ETRN) is a new long position for the Partnership. ETRN is the former midstream arm of Marcellus natural gas producer EQT. They own gathering assets (small diameter pipelines that directly connect to the wellhead) and long haul transportation assets (larger diameter pipelines that move gas over long distances, usually under take-or-pay contracts). The company formally separated from EQT via spin-off in late 2018. At the time, the capital structure was pretty complicated – there was a collection of three (yes, THREE) publicly traded currencies that held various ownership interests in the core assets, but this was simplified in a combination of asset swaps over the years so that there is now only one publicly traded vehicle (ETRN).

The stock has been a poor performer since its separation due to missed financial targets and increasing debt-levels, both owing to the company’s struggle to complete the Mountain Valley Pipeline (MVP). The MVP is intended to provide much needed takeaway capacity from the Appalachian Basin to markets in the U.S. Southeast (where there is growing gas demand for power generation) as well as the Gulf Coast (for eventual export). The project has been an utter disaster for the company because of continued opposition from the environmentalist community. Originally targeted to come online in late 2018 at a total cost of $3.5 billion, today we’re looking at a best case scenario of mid2023 at a total cost of $6.2 billion. In support of the expanding price tag, ETRN has had to take on increasing amounts of debt. At the same time, the company has pulled the rug out from under dividend-oriented investors, first in the form of revised guidance for no growth vs. 8-12% at the time of separation, and second in the form of a (backdoor) dividend cut. So it’s sort of easy to see why investors have been sour on the stock.

The Partnership began acquiring shares in late June / early July when ETRN was trading around $6.00. As a general matter, I disdain using DCF for valuation purposes, as it’s a silly exercise that involves a lot of bullshit guessing about the future. But there are exceptions to every rule, and ETRN is one of them. This is a business that is fairly simple to model. Certain volumes are contractually set. Non-contractual volumes should continue flowing even in a depressed natural gas price environment (and today’s price environment is anything but weak). And prices for volumes are known variables (again, with a significant portion being contractually set.. (Click here to read more)”

Equitrans Midstream Corporation (NYSE:ETRN) is not on the list of  30 Most Popular Stocks Among Hedge Funds. As per our database, Equitrans Midstream Corporation (NYSE:ETRN) was held by 27 hedge fund portfolios at the end of the first quarter, which was 17 in the previous quarter.

We discussed Equitrans Midstream Corporation (NYSE:ETRN) in another article and shared Miller Howard Investments’ views on the company in the previous quarter. You can check our hedge fund investor letters Q2 2022 page for more investor letters from hedge funds and other prominent investors.

Disclosure: None. This article is originally published at Insider Monkey.