TRGP today (2/20/2019) reported in line Q4 results if we exclude the benefit from the splitter contract cancellation. Updated 2019 guidance was below our pro-forma expectations on lower volumes, a Grand Prix delay, and the Badlands sale structure. The lack of disclosure on Blackstone’s preferred interest in the Badlands yesterday exacerbated a two-day rollercoaster for the stock and created confusion. TRGP has very attractive assets and a great long-term growth profile. The problem is the $1.35B midpoint of 2019 EBITDA guidance is slightly below 2018A, coverage this year of 0.9x is down from 1.04x in 2018 and way below the peer average of 1.6x, while debt / EBITDA increases to 5.4x in 2019 from 4.9x in 2018. Peers are all moving in the other direction. We think it will be hard for TRGP to regain a premium valuation in 2019 – they need to show more execution on growth first. Peer Perform.
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Enable finished out the year by topping its guidance range and reinforcing visibility into 2019. ENBL has continued to execute well against its financial targets and has a solid balance sheet and an above-average yield with good coverage. On the other hand, there is less clarity on the longer-term growth path beyond Gulf Run, and it is unclear when distribution growth may ramp up (note, still not in the IDRs). ENBL trades near the group average which we believe is warranted given these factors. We remain Peer Perform.
This morning (2/19/2019) TRGP announced a sale of a 45% interest in the Badlands assets to Blackstone for $1.6B. This was well above the $1B hurdle often cited by investors and implies an impressive 15-16x EBITDA on our 2019 estimate. If we assume $500-600M of debt paydown is needed to offset the EBITDA being sold and stay leverage neutral, the sale creates $1B of equity capacity. TRGP has $2B of growth capex and a ~$300M Outrigger earn-out payment this year, so $1B of new equity capacity would fund over 40% of this. TRGP stated the sale “satisfies a substantial portion” of 2019 equity needs. More broadly, this is yet another example of private equity paying big values for midstream assets – the public companies should sell more assets proactively.
Enbridge closed out a year of significant progress on simplification, balance sheet strengthening, solid growth, and a reorientation to a self-funded model. The outlook is unchanged from the December analyst day - strong growth into 2021 and then 5%-7% growth thereafter, fully internally funded while keeping leverage low. We believe this is a highly attractive midstream business model, particularly coupled with ENB's quality, largely regulated asset base. We remain Outperform.
TRP ended the year with a strong Q4 taking advantage of favorable crude spreads. TransCanada continues to have one of the largest and longest duration growth backlogs in the midstream space and it has a very high asset quality. The stock trades at a small premium to the group average, which we believe is warranted as it balances the growth and high-quality asset base with the uncertainties on KXL and the ultimate financing plan. We remain Peer Perform.
2018 EBITDA was just below our estimate mainly on one-time items related to the separation. ETRN and EQM continue to build out new growth including the upsized MVP Southgate and additional contracted gathering investment. Despite this EQM and ETRN both trade nearly 2 turns below the midstream group on EBITDA; we believe that the market is heavily discounting the risk on MVP. Outperform.
Williams underperformed the group by about 50 bp following its Q4 earnings announcement. Overall Q4 was in line with expectations and the company maintained 2019 guidance. Management remains upbeat about the project backlog and prospects to continue deleveraging. The stock trades about in line with the group and we continue to like the growth potential around Transco, the expanding footprint further West, and the prospects to continue to reduce leverage. Remain Outperform.
On Friday (02/08/19), the PA Department of Environmental Protection (DEP) suspended all reviews of clean water applications for ET projects. They cite non-compliance with orders to stabilize the Revolution construction site after a landslide caused a gas gathering pipeline to explode in September. PA Governor Wolf issued his own statement supporting the action and stating “there has been a failure by Energy Transfer and its subsidiaries to respect our laws and our communities”. He also called upon the PUC to require a “remaining life study” of the older ME 1 NGL pipeline – an action favored by opponents of Mariner. There have been a number of incidents during construction of key ET projects such as DAPL, Rover, ME 2, and Bayou Bridge over the past few years.
PAA had strong Q4 results AMC with another big beat at the S&L segment bringing excess cash in the door. We thought it was a good call. PAA is focused on integration, low-cost expansions, and operational leverage to drive growth, while preserving financial flexibility. We should get an update on capital allocation – distribution growth, leverage targets, and possibly buybacks by the next earnings call. We like that PAA is considering reducing the 3.5 – 4.0x leverage target, disclosed a 12-14% return target on growth, and included earnings guidance in the slides as a metric.
EPD’s Q4 results on 1/31 were in line without big surprises. The growth outlook is on track with some new petrochem projects in the backlog and the crude conversion project starting up early. We thought the call, greater use of traditional financial metrics, and new $2B unit buyback authorization were all positives. We think EPD will only buy back a modest amount of stock in 2019 based on capex and leverage goals (we assume $300M), but this could be much larger in 2020+ depending on the capex trajectory. We like EPD’s attempts to use more traditional, non-MLP centric metrics to better message to generalist investors. The reality is EPD screens attractive on this basis at only 14x 2019 P/E and a 5% FCF yield even after sizeable growth capex in 2019.