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Rice Midstream Partners IPO Preview

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Since the last MLP IPO, Antero Midstream, the benchmark index is down 22% as the crude crash has spurred investors to dump their energy exposure while crude searches for a bottom and forecasted capital expenditures are readjusted.  Despite the broad market decline, Antero and the other recent IPOs, CONE Midstream Partners, Shell Midstream, and Dominion Partners, have performed relatively better, likely due to a combination of savvy investors and no risk associated with current and near term distributable cash flows. 

 

Rice Energy is looking to launch Rice Midstream Partners through this narrowing, if not closed, window of opportunity, with pricing expected on December 17th.  RMP will have quite a few similarities with their IPO peer group.  A strong set of gathering and processing assets with long term dedicated acreage contracts and no short term commodity price/volume exposure with organic volume driven growth.   Gathering and Processing services are contracted on a long term dedicated acreage basis where service fees are fixed, but dependent upon volume.  If producers cannot drill with necessary margins, volumes may decline and gathering and processing revenues will be impacted.  The majority (83%) of Rice Midstream's 2015 forecasted DCF is a result of these contracts with Rice Energy, which has hedged much of their production through 2016 and reports to maintain sufficient ROI down to $2.75.  The remainder of the cash flows are derived from 3rd party gathering and processing agreements with firms such as Antero and EQT.  Rice has drilled 76 wells and has an inventory of 600 opportunities across 137,000 acres in the Marcellus and Utica.   Rice expects to increase production through 2015 with a flat rig count of 9, which will be the primary driver of organic DCF growth over the short term.   

 

RMP will follow the formula of dropping down assets at a 9x EBITDA multiple, and will reap the benefits through the majority (56.5%) LP ownership and 100% Incentive Distribution Rights.  Target yield will be 3.75% (100bps higher than AM as of 12/12) with an expected coverage ratio of 1.15x.  Presently, Rice does not have a significant set of EBITDA inventory to drop into RMP, but are developing new assets which could be available by 2017.

 

The Initial Assets

 

The IPO will raise $500MM for a 43% public stake in the LP, with $438MM going to Rice Energy for the assets below.   83% of the gathering volumes are from Rice wells across 63,000 dedicated acres contracted for a 15 year period.  The remaining 17% are volumes from 3rd parties covering 21,000 acres contracted for an average of 6 years

 


 

2.8MMDth/d high-pressure dry gas gathering system in Washington County PA

 

420MDth/d high pressure dry gas gathering system in Greene County PA

 

 

The company expects to generate $49.6MM of Distributable Cash Flow over the course of 2015, the majority of which is derived from the gathering volumes associated with the Rice production.  

 

 

 

 

 

ROFO Drops

 

RMP will have Right Of First Offer on several assets, mentioned below, owned and under development by Rice Energy. The water assets are likely awaiting a Private Letter Ruling, as is the case with Antero’s water assets, before becoming a legitimate asset for drop down to Rice Midstream. 

 

Ohio/Utica Gathering System – 49.7 miles of high pressure gathering pipeline expected to be completed in 2015.  Rice has two non-binding LOI’s with Gulfport Energy and Mark West Energy Partners to dedicate acreage to the gathering system.

 

Fresh Water Distribution Systems -  Washington County, Greene County and Ohio each have a water distribution system which is fed by the two nearby rivers.  All three are under expansion and require minimal capital expenditures as the water pipes are co-located next to the gathering pipelines.

 

Due to the PLR issue mentioned earlier, the Ohio Gathering System is the key asset for future drop down growth for which EBITDA is not certain.

 

Summary

 

Although Rice Midstream Partners is following the recent natgas offerings from Dominion, CONE and Antero, the lack of transparent drop down assets will require significant gathering volume growth in order to achieve management’s best in class long term distribution guidance.   While Rice operates with high margins, there is greater risk associated  past 2016 if natural gas prices collapse and hedging becomes ineffective.  With 17% of DCF contributed by 3rd parties, RPM has exposure to less profitable producers who may reduce production more significantly than Rice.   The target yield assumes a 20% DCF CAGR, which will need natural gas to remain above $3.00 post 2016, less of  a certainty with the structural changes playing out in the crude markets.

 

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