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We’re hearing a more cautious tone on the group overall after a strong start to the year. Q4 earnings were mixed and mega project risks are front and center on investors’ minds. The C-corps keep outperforming the MLPs and most dedicated midstream investors aren’t sure why. Perhaps we’re seeing new generalist buyers? We’re also hearing consistent debates on a number of key stocks from investors. Please open the full report for details.
On Thursday (03/14/19) EQM announced the purchase of two gathering assets – a 60% stake in the Eureka header system and 100% of the Hornet gathering pipeline in the SW Marcellus for just over $1B. EBITDA is $100M with visibility to 20% annual growth. EQM will finance the purchase with a $1.1B convertible offering and the transaction will be DCF accretive post year 1. We think the acquisition makes strategic sense but the timing is less than ideal given EQM’s valuation. That said we continue to believe the story on EQM/ETRN remains tied to MVP – it is heavily discounted in the stock and we continue to see some paths forward on it getting done.
On Friday (3/1/19), Enbridge announced that it now expects Line 3 Replacement to be completed in 2H-2020 rather than late this year. This stems from Minnesota’s notification to ENB that it would take until November to issue the remaining state permits. Getting the US Army Corps permit would take 30-60 days following the state permit issuance. This would mean construction will not likely start until January-February, and taking into account weather, a late Q3-early Q4 completion appears reasonable. This is obviously a disappointment for Enbridge. Even though we don’t think that most investors were baking in an on-time completion (we had been assuming Q1-20), this does push out the timing of ENB’s key near term growth project.
We thought results in Q4 were solid with an average EBITDA beat of 3%. DCF/share growth of 8% YoY in Q4 was down from the breakneck double digit growth seen in Q2 (13%) and Q3 (18%), but is clearly still attractive total return when combined with safe 7% yields. Our updated forecasts still call for 5% DCF/share growth in 2019, preserving a low double digit total return investment proposition. That said, the group now seems more dependent on a valuation call near-term given more uncertainty over the pace of production growth and concerns over high levels of competition and a cyclical shift toward potential overbuild.
Cheniere underperformed the AMZ modestly after reporting earnings yesterday (2/25/19). While not unexpected management noted that the decline in global LNG prices would be a pressure (though not enough to change 2019 guidance) – unfortunate given its short-term open position this year. On the other hand, it was clear that incremental growth opportunities even beyond Sabine 6 are gaining momentum. This makes an already compelling contracted free cash flow story even more attractive. We reiterate our Outperform rating.
What should have been a constructive guidance update on the yearend earnings call got bogged down unnecessarily by a focus on the dividend and a wide capex range. Importantly, even though there was a concern on the call that management was wavering on its 9%-11% dividend growth outlook, on follow up with the company it was clear this was not the case. Bottom line, we still see the OKE growth plus operational leverage story as fully intact and one of the most attractive models in the sector – reiterate Outperform.
4Q18 EBITDA beat consensus by 5% and would have been an 11% beat excluding a one-time crude inventory change. 2019 EBITDA guidance of $10.6B - $10.8B was maintained and ET gave more color on commodity sensitivity and spread assumptions that seem sufficiently conservative to us. A simple annualization of 4Q18 EBITDA (which included a negative $150M one-time item) would put ET in the middle of the 2019 guidance range. While spread-based margins may moderate from robust Q4 levels, ET will benefit from the start-up of ME 2, frac 6, Bakken expansion, and Bayou Bridge. 2019 consensus before the print was below ET’s guidance, whereas we think ET can even beat guidance.
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