We thought the tone at last week’s MEIC conference was positive. Companies are executing on their plans and continuing to grow. Investor focus is on growth opportunities within existing business platforms, capital discipline, and some newer areas like M&A, ESG, and water infrastructure. Equity needs, leverage, coverage, and structural questions have generally faded as big topics from a year or two ago. There is some concern, however, the sector will transition back to an overbuilt environment with investors wanting to understand the implications. See our detailed recap of key industry themes and company takeaways in the full report.
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In this week’s report we discuss the stronger than expected Q1 earnings, which resulted in an average EBITDA beat of over 5% for companies in our coverage and average YoY DCF/sh growth of ~10%. Investor focus was on commodity pricing, particularly with regards to NGLs, and mega project risk given recent struggles with MVP, L3R, and KXL. We also dive into recent M&A trends in midstream after the announced acquisitions of BPL and ANDX, and what this means for valuations moving forward. Please see the full report for details.
The MLP and Energy Infrastructure Conference (MEIC), will be held May 14-16. Many MLP management teams will be in attendance with a larger number of C-corps this year as well, notably ENB, KMI, TRGP, and LNG. We’re looking forward to it. Four of us Wolves, running around the desert together in Las Vegas. This report is a helpful guide for investors attending and includes lots of questions to ask companies, as well as summary model information. Key industry topics are discussed below with company-specific topics in the body of the report.
Enbridge started the year off with record Mainline volumes, wider spreads, and favorable weather conditions to offset some of the impending L3R headwinds. ENB added CAD $500M of new projects to its now CAD $16B project backlog and provided more color on structure of the future Mainline tariff system. ENB also announced a new CFO, Colin Gruending, who is replacing now Chief Development Officer John Whelen. We continue to believe in ENB’s highly attractive and simplified business model and largely regulated asset base. ENB currently trades at a modest premium on 2021 EV/EBITDA though we believe this should be higher given its high-quality contracted asset base and improving balance sheet. Outperform.
While ET’s story can sometimes be a bit of a rollercoaster, financial results have been consistently good for a while. 1Q19 EBITDA beat our forecast by 1% and consensus by 6% when adjusting for a one-time inventory benefit. FY 2019 EBITDA guidance of $10.6B - $10.8B was reiterated. ET signaled they are tracking toward the higher end and we think they can beat the outlook, particularly if Permian gas stays weak. There was a more conservative message on capex this quarter at a $3-4B run-rate vs. prior indications of not slowing down from this year’s $5B. The company will now target 4.0x – 4.5x leverage, down from 4.5x previously. We think this is a good move and shows a larger focus on leverage, but note it may take a couple of years to get there using Moody’s calculation basis.
After market close (5/9/19), KML (Peer Perform, $14/sh target price) announced that that they will continue as a stand-alone company following the strategic review. It’s been 8 months since Trans Mountain was sold to the Canadian government which started a prolonged strategic review. There was reason for optimism last month as KMI indicated a decision would be made in the “coming weeks” citing the “complexity of the situation”. We read this as there likely being a potential buyer, but we also noted at the time that KMI would not confirm that a KMI – KML transaction was still a possibility so it seemed like the choices were down to a sale or the status quo. We’ll get more color on management’s rationale on a 9am ET call tomorrow.
Cheniere beat expectations on Q1 and reaffirmed the 2019 outlook, addressing investor concerns on its near-term exposure to spot LNG markets. The company keeps demonstrating the ability to execute, even in more depressed market price environments. We continue to believe that Cheniere is a compelling contracted free cash flow story with significant upside potential from new liquefaction capacity. We reiterate our Outperform rating.
After market close today (5/9/2019), ET reported 1Q19 EBITDA of $2.8B, which was 5% above our estimate and 9% above consensus. ET stock yields 8% and coverage was over 2x for the quarter. The company reiterated FY 2019 EBITDA guidance of around $10.7B, which seems conservative to us since Q1 results equal 26% of FY guidance. ET also reiterated growth capex guidance of $5B. This is another strong result.
TCP reported Q1 earnings that were stronger than expected, though down YoY. Management has done a good job minimizing the financial impacts from the FERC tax policy changes and has transformed the narrative into an organic growth story, with key projects on track. That said, it remains one of the few midstream names with declining EBITDA in 2019 and it trades at an average multiple - Underperform.
Yesterday (5/7/2019), PAA’s Q1 EBITDA beat our estimate, consensus, and company guidance by 15% or over $100M. It was all from a blowout quarter in the S&L segment, while Transportation was light despite in line volumes, and Facilities was a little strong. The FY 2019 S&L outlook has evolved from $350M with upside as of the Q3 call, then was maintained at $350M while acknowledging spread compression on the February call, and last night was raised to $450M alongside a huge $278M for Q1 alone. PAA provided little disclosure besides noting wider NGL and crude basis differentials. We were surprised given prior commentary on having done significant hedging, and wish there was more transparency on S&L drivers. PAA continues to downplay the segment as overearning and notes 2020 pressures. But in the meantime, this is incremental cash that can be redeployed and we sense further upside to the 2019 S&L outlook is possible.