CONE Midstream Initiated At Buy From Janney On Attractive Valuation

The brokerage sees volumes in the core Marcellus growing post 2017 to meet U.S. natural gas demand, and it noted that CONE's assets are positioned in some of the lowest cost acreage in the United States.

"The combination of improving regional gas prices and low F&D costs for its customers should lead to increased drilling activity in 2017," analyst Akil Marsh wrote in a note.

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"Additionally, dropdowns provide a cushion to EBITDA growth. This all translates into +13 percent annual distribution growth over the next few years (well above the peer group's low single digit growth)," Marsh continued.

Implications For The Stock

Meanwhile, the sponsors, including CONSOL Energy Inc.CNX, also own freshwater infrastructure assets that could eventually be dropped into the partnership as well. Specifically, CONSOL Energy has Pennsylvania deep Utica acreage, which would help CONE to gather gas should CONSOL accelerate activity.

Despite shares rallying more than 140 percent since their February lows, the analyst noted there is additional room for upside as investors begin to price in additional drilling activity on CONE's dedicated acreage in low cost Marcellus shale.

Marsh has a fair value estimate of $22, which is based on a 10.0x multiple on his 2018 EBITDA estimate.

"We consider CNNX to be valued attractively given our expectation for +13 percent annual distribution growth over the next three years and the +6 percent yield on our 2017 distribution estimate," Marsh added.

At time of writing, shares of CONE Midstream rose 2.16 percent to $18.48.

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