Cheniere held an impromptu mini analyst day and formally updated run-rate EBITDA and cash flow guidance in light of last week’s FID of Corpus Christi 3. EBITDA guidance for 8 trains is now $4.3-$4.6B vs. $4.2-$4.7B previously. Cash flow is better than expected, at $2.0-$2.3B vs. $1.8-$2.2B previously mainly due to lower expected interest expense and lower minority interest. Sabine 5 and Corpus 1-2 also look ahead of schedule. Cheniere remains one of our best midstream ideas, with significant growth and cash flow coming from 20 year locked up contracts and option upsides from LNG marketing and the potential for additional expansions over time. Outperform.
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With U.S. production increasing fast, several big simplification announcements, and oil prices much improved, the fundamental tone was positive at MLPA. Turnout was reportedly higher than last year even with each of the large C-corps still sitting out of the event. That said, FERC and structure were clear overhangs. On FERC, we heard more questions than answers. Structure / simplification was discussed at nearly all our meetings and often overwhelmed the conversation. We think continued (and speedy) resolution around FERC / structural issues should help bring investor focus back to a strong fundamental set up, but there will be uncertainty in the meantime.
Last week we had the opportunity to meet with INGAA and the staff of FERC to review the latest on the changes on the pipeline regulatory policy front and the next steps to watch for. Overall we got a better understanding of the legal constraints FERC was under that led to the decision to change MLP tax policy to eliminate the tax allowance for cost based pipelines. We came away with the view that there is not much room to change the policy. In that context it is not a surprise that in front of the 501-G filings this fall that already many pipeline MLPs are moving toward corporate structures - SEP, EEP, WPZ, BWP, and TCP. Despite the MLP tax policy change being unwelcome, we still believe the acceleration of structural changes is a good thing for the sector.
The annual MLPA conference, newly renamed as the MLP and Energy Infrastructure Conference (MEIC), will be held May 22-24 in Florida. Many MLP management teams will be in attendance. This report is a helpful guide for investors attending and includes questions to ask for covered companies, as well as summary model information. Key industry topics are discussed below with company-specific topics in the body of the report.
Cheniere continues to execute and its big Q1 highlighted its ability to capitalize on the spike in winter global LNG prices. While the marketing upside bolstered cash flow and drove a 2018 guidance boost, the solid construction progress on Sabine 5/Corpus 1-2 and the near term FID of Corpus 3 are even more meaningful to long term value. Cheniere remains one of our best midstream ideas, with significant growth coming from 20 year locked up contracts and option upsides from LNG marketing and the potential for additional expansions over time. Outperform.
After a tumultuous March, MLP markets turned over the past two weeks alongside a run in crude and widening spreads. The last time we saw $70 Brent (outside a few days in early Jan) was December 2014. That said the AMZ remains an underperformer vs. the XLE, oil, and the broader market YTD and valuations remain attractive - the AMZ is still due for a catch-up trade. We see another generally constructive earnings season - Q1 DCF / unit growth up 7.4% YoY on operational leverage, projects in-service, and a more normal winter. The FERC tax order remains an overhang, but recent comments by Commissioner Chatterjee and charged industry feedback signal that more clarity might be forthcoming.
Wolfe Research's Senior Utilities analyst, Steve Fleishman, hosted a Fireside Chat with Cheniere Energy EVP & Chief Commercial Officer, Anatol Feygin.
FERC’s proposed policy change to no longer allow MLPs to recover a tax allowance in pipeline rates is an unwelcomed overhang. The timing is bad. Fundamentals had just turned more positive and Q4 results were strong, but stocks have lagged due to a lack of sustained investor sponsorship and MLP fund inflows. Near-term, the new uncertainty and downward rate pressure created by FERC’s move hardly seems likely to now inspire new buying interest in the space. We think the 4.6% drop in the AMZ is a little overdone on a fundamental basis. That said, relative stock moves seemed generally rational with C-corps outperforming and more exposed MLPs down the most.
Cheniere’s MLP has been relegated to a back seat role as investor focus has been squarely on its parent’s push to move on the Corpus 3 expansion. However we still see CQP as attractive: it has an 11%+ yield on run-rate distributions; there is upside option value from Sabine 6; and corporate simplification could be a positive long term. Outperform.
Cheniere continues to execute very well on its growth plan – the existing four trains are operating well, construction on the other three trains is moving along ahead of guaranteed schedule, and the company has begun to sign new long term contracts. Cheniere still has a significant leg up over other US LNG projects and we expect the company to push hard to find incremental expansion even beyond Corpus 3. We are now assuming Corpus moves forward and continue to see the stock as very attractive - Outperform.
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