KMI’s Q4 results came in above market expectations primarily due to a 40% YoY decline in G&A, some of which was driven by greater capitalized overhead and timing-related items. DCF was further above our estimate on lower cash taxes and favorable interest income after the Trans Mountain sale. Pipeline volume data was strong and continues to come in above expectations. We found the call a little downbeat with more focus on some wrinkles like Ruby’s contract with PCG, rate settlement talks, and Elba delays. On a positive note, KMI did add a strong $500M of new projects to the growth backlog. We’d like to see continued progress on this front to help backfill for the ~$1.3B of projects that entered service in Q4 and the $1.2B Elba project which starts up shortly.
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Last week we hosted investor meetings with Equitrans Midstream CEO Tom Karam. ETRN is about 2 months out from its spin from EQT and Karam is optimistic on the long-term opportunities to grow the company. He is initially focused on finishing Mountain Valley Pipeline and completing the IDR swap with EQM. Longer term the focus will be on keeping leverage low, growing the business across the existing footprint and considering other ways to achieve scale.
KMI reports earnings AMC on Wednesday (1/16) and will hold an Analyst Day on 1/23. We forecast 4Q18 and FY ‘18 EBITDA of $1,933M and $7,540M, respectively. This is slightly above consensus. KMI previously indicated they expected to beat the $7.5B EBITDA budget.
We are downgrading TC Pipelines to Underperform from Peer Perform. TCP spent most of 2018 under pressure from FERC mandates on tax reform, but the partnership was quite successful in mitigating the worst-case impacts and getting to regulatory certainty. However we expect EBITDA to drop meaningfully in 2019 from the actions related to tax reform as well as the buyout of two contracts at Bison. Based on our updated estimates we see TCP trading about in line with the group on yield and EBITDA. While the company's actions have made the best of a bad situation, the relative lack of clear growth projects, the long term potential headwind of Bison, and relatively high leverage near term suggest that a discount is warranted relative to the rest of the sector that has improving fundamentals. See our detailed sector note here.
Upgrading Enbridge to Outperform from Peer Perform. Enbridge has arguably done as good a job as any other company in the space realigning its balance sheet and financing plan to reflect the new realities of the capital markets. ENB sold over CAD$7B in assets in 2018 and moved its leverage to below 5x several years ahead of plan. Beyond that the company also moved to simplify its (very) complicated structure by rolling up its sponsored vehicles. ENB now has a nearly 7% yield, clarity on 10% annual growth through 2020, and 5%-7% growth longer term - all without the need to issue equity via block or even DRIP. We believe this profile is what most large cap midstream companies should look like. Finally, we like the defensive characteristics of the company as well - most of its assets are long term contracted or utility like, and it should do relatively better in periods of volatility (also, at 15x 2020 EPS, it is less expensive than a utility). See our detailed sector note here.
We are downgrading TransCanada to Peer Perform from Outperform. In our view TRP still has one of the best growth backlogs in the space - CAD$36B of defined projects and tens of billions in active development. It also has a utility-like business profile, with virtually all of its Canadian operations under cost of service constructs and much of the Columbia system under long term take or pay contracts. That said, we believe the stock could be hindered in 2019 as it comes closer to a decision on Keystone XL and there is greater certainty on the financing plan. See our detailed sector note here.
Enbridge now our preferred Canadian midstream name. We are upgrading Enbridge to Outperform from Peer Perform and it is now our preferred Canadian midstream name. ENB executed very well in 2018: fully simplifying, repairing its balance sheet with significant asset sales, and getting Line 3 Replacement approved. It has become what we see as a prototypical large cap midstream model: high yield (7%), high growth (10% through 2020, 5%-7% sustainably thereafter), and no foreseeable need to access the equity markets. Finally, ENB is well positioned for Canadian crude takeaway given the uncertainty over TMX and KXL, and it appears headed to reduce volatility further under a long-term tariff agreement on the Mainline. We are boosting our target price to $37 from $36.
Wolfe Research's Senior Utilities & Midstream Analyst, Steve Fleishman, and Midstream Analysts, Alex Kania and Keith Stanley, hosted a webcast to discuss stock ideas and themes for 2019 utilities, midstream, power, and renewables.
Attractive valuation, but with late cycle multiple compression risks. Midstream stocks offer low double digit total return (dividend + growth), which is attractive at this point in the cycle especially for a relatively low risk business. Relative EV/EBITDA multiples are slightly below the SPX and UTY, and P/E is now in line with the market. We saw a 10-20% compression of EBITDA and cash flow multiples in 2018. The risk is market multiple compression in 2019, which has an amplified effect on equity values for a levered sector.
Terminating coverage of EEP on ENB rollup completion . On December 17, unitholders of Enbridge Energy Partners approved its acquisition by Enbridge and the transaction closed on December 20
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