Wolfe Research's Senior Utilities Analyst Steve Fleishman and Midstream Analysts Alex Kania & Keith Stanley hosted a webcast to discuss the annual Proxy Review for Utilities and Power
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We had the opportunity to catch up with a number of investors last week through virtual meetings. In this week’s report we provide feedback on our conversations and discuss some key macro and company-specific themes that have emerged. In general, we sensed a lack of conviction on the macro and recent trading trends as well as a greater-than-expected focus on balance sheets.
On Thursday afternoon (5/28/20) the Ninth Circuit Court of Appeals refused to stay a lower court’s ruling that vacated the Army Corps NWP12 water permit for oil/gas pipelines. The refusal to stay the ruling was a disappointment relative to expectations and will almost certainly mean delays for pipeline projects that had been relying on NWP12 for water crossings. Of the projects it appears that MVP has the most flexibility to work around it but delays are likely. Substantial work on KXL and ACP may be stymied well into next year. We downgrade Dominion in a separate note (link).
We are refreshing our baseline sum-of-the-parts valuation multiples for our coverage. We retain our same fundamental approach of valuing individual midstream businesses differently based on their characteristics, while incorporating basin exposures and balance sheets for individual companies. However, we can’t ignore the market rally and increased investor optimism / risk appetite. Our new baseline applies target 2021 EV/EBITDA multiples of 10.5x for gas and refined products pipelines, which is a slight discount to utilities. We use 8x for G&P, which is a slight premium to large cap E&P. We apply 9.5x – 10x for liquids pipes and exports. See Exhibit 2 on page 2 for details.
Last week we took a closer look at the longer-term trajectory of midstream balance sheets and cash flow. In this week’s report, we take this a step further and explore the potential free cash flow generation and yields across our midstream coverage and point out some interesting observations. We also take a look at the updated FERC ROE methodology for oil and gas pipelines and give our thoughts on how this may affect ROEs moving forward.
Wolfe Research's Senior Utilities Analyst Steve Fleishman and Midstream Analysts Alex Kania & Keith Stanley hosted a webcast to discuss AGA takeaways, Midstream balance sheets, Evergy M&A scenarios and PCG updates
Midstream equities have bounced back nicely with the market and investors appear squarely focused on the recovery trade. This is encouraging, but we still see lasting impacts from this year’s oil collapse and associated re-basing of U.S. shale production levels. In this report, we analyze midstream balance sheets vs. history and other sectors, run scenarios on how companies could get to historically elusive leverage targets, and provide color on a seemingly widening leverage gap within the sector. We think balance sheets will be a key differentiator for the stocks if volatility picks up again this year, the rating agencies get more active, and/or Biden wins the Presidency.
Alex Kania, Blake Gendron, Josh Silverstein, Sam Margolin have an open mic format to discuss daily sector, stock, and commodity thoughts, what we’re hearing from management, answer any questions, or just allow you to vent.
The 1Q20 earnings season officially concluded this past week and brought with it some updated 2020 outlooks and helpful guideposts. With more clarity on the 2020 outlook in hand, we take a renewed look at how valuations have changed so far this year and point out some interesting observations. We also give updated thoughts on balance sheets and how leverage has changed over the course of the year for the gas-focused stocks compared to the more liquids-focused names. We conclude this week’s report with a brief discussion of the Wolfe E&P team’s Moody’s webinar this past week and some takeaways for how the rating agency views the midstream space today.
The Wolfe Utilities & Midstream team hosts a webcast on Fridays at 11:00AM ET to discuss utilities & power news and themes for the week. Presenting analysts include Steve Fleishman (Utilities & Power), Keith Stanley (Midstream), and Alex Kania (Midstream).
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