We thought yesterday’s Analyst Day (06/05/18) had more positives than negatives on the margin, and the Permian strategy was articulated well. 2018 EBITDA and capex guidance were reiterated, as were expectations for 14-15% fee-based EBITDA growth in 2019. An update on likely acceleration of capex will be given with Q2. PAA is the poster child for what’s going on in the Permian right now – a lot of exciting growth potential, but also a lot of uncertainty given infrastructure constraints and intense competition driving down long-term tariffs. We do not think the premium valuation on 2019 EBITDA is warranted given the risks and maintain our Underperform rating.
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KML announced the Canadian government will buy Trans Mountain and the expansion project for C$4.5B. Investor reaction was initially positive, but the stock fell 3% on the day. The sales price is highly attractive. We estimate that the assets being sold contribute about C$220M of EBITDA. If we apply a 12x multiple, it implies $2.6B of value with the remaining $1.9B attributable to TMX, nearly double the $1.1B spent to date for a project that could have been abandoned.
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.
This morning’s (05/29/18) announcement that KML will sell the existing pipeline and expansion project for C$4.5B implied a value well above our expectations. Commentary suggested a likely distribution of that cash with a focus on de-leveraging. We view the sale positively on multiple fronts – 1) A key project overhang has been removed, which may bring investors back into the stock; 2) Our 2020 leverage outlook improves to 4.3x from 4.7x; 3) KMI now has strategic optionality through KML as a possible acquisition vehicle; and 4) Mgmt credibility has improved having shown strong execution on the TMX issue.
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.
Aggressive ALJ order seeks to halt ME 1, 2, and 2x – PUC response is what matters. An ALJ order was posted to the PUC docket today ordering stoppage of the existing Mariner East 1 pipeline, and of construction on ME 2 and ME 2x in West Whiteland township, PA. The order was in response to the complaint from a state Senator. The ALJ cited a laundry list of violations, incidents, poor work practices and planning around HDDs, and geology that is not suitable for pipeline construction. The judge calls for a review of ME 1 operations, emergency response plans, and ME 2 construction practices.
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.
Enbridge’s announcement this morning (5/17/2018) of offers to buy in all three MLP vehicles (EEP, ENF, SEP) for C$11.4B in stock would get rid of two overhangs for the company: 1) FERC MLP tax cash flow risk and 2) corporate structure complexity. Combined with the recent asset sale announcements, preferred issuance and strong Q1, we think Enbridge is making solid progress towards becoming a more stable midstream story again. Despite this we believe the stock is going to be driven near term by the Line 3 Replacement decision in late June which still faces uncertainty. Valuation looks fair - we reiterate Peer Perform.
Canadian Finance Minister Morneau held a press conference this morning (05/16/18) on the status of negotiations with KML ahead of the 5/31 deadline. We found it light on details with two key points of emphasis. First, the gov’t stated a willingness to indemnify against an unquantified amount of future financial loss directly related to B.C.’s political efforts to delay the project. The indemnity would be transferable to a new third party investor if KML doesn’t proceed. This is positive, although measurement of B.C. created losses sounds difficult and imprecise to us. Second, Morneau emphasized that any solution must be fiscally responsible and fair to Canadians.
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