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.
Search Coverage List, Models & Reports
Search Results1-10 out of 33
Q3 results were even better than we expected. None of our covered companies missed with a median EBITDA beat for the quarter of 5%. More importantly, the median DCF / share growth in Q3 was 18%!! This figure excludes companies involved in M&A and is more reflective of true growth in the business – see p. 2. While this pace of growth clearly won’t last forever, what other sector is paying a 7-8% yield and growing cash flow per share by almost 20%? The fundamental picture is very strong, balance sheets are improving, and equity needs have been dramatically reduced. EPD’s CEO Teague stated this is “the strongest business climate we have seen in recent memory.”
Enable had a strong Q3 and released 2019 guidance ahead of consensus, but it ended up modestly underperforming the AMZ on the day. This appeared to be because the guidance beat was mostly on the Velocity acquisition, whereas the underlying growth was about in line with expectations. ENBL trades near the group average on valuation, which we believe is warranted as it has a solid growth backlog and balance sheet with good growth potential. We remain Peer Perform.
We are forecasting Q3 EBITDA growth of nearly 15% vs. last year, with median DCF per share rising by 15% YoY as well. Fundamentally, the sector continues to benefit from positive dynamics as production volumes accelerate across most key basins, new projects come into service, and wide locational price differentials highlight the need for new infrastructure investment. The Q3 fundamentals are similar to Q2 which saw strong results and the AMZ outperform the market by 8% over the course of earnings season. However, unlike Q2 we see consensus as largely there; we have a roughly even split of beats and misses vs. consensus. So it’s less clear to us if Q3 will again be a positive catalyst or more neutral near term. Ultimately, we believe that as the companies continue to show above-average growth, simplify, and get to sustainable leverage, investor support for the sector will increase.
Enable had an in-line Q2, but pointed to the upper half of (already raised) 2018 EBITDA guidance of $975M-$1.05B. Growth projects continue to make headway - Wildcat was moved into service and CaSE and Muskogee remain on track to be up and running over the rest of 2018. The fundamental story remains high quality. Our main concern remains when CNP starts to sell down its 54% interest – interestingly, this was the first call since the CNP strategic review announcement in 2016 where CNP was not brought up. We remain Peer Perform.
Last night (7/18/2018) FERC issued a final rulemaking on how to handle tax reform in regulated gas pipeline rates as well as a clarification of the policy statement that eliminated the tax allowance for MLPs. These stemmed from initial orders in mid-March. While FERC did not change the fundamental position that MLPs (in a vacuum) still can’t collect an income tax allowance it appears that under the final rule natural gas MLPs that are consolidated by a parent corporation can claim that they are taxpayers. Bottom line, this appears to be a significant change from the initial ruling in March for a number of pipeline MLPs that are consolidated by C-corps.
With U.S. production increasing fast, several big simplification announcements, and oil prices much improved, the fundamental tone was positive at MLPA. Turnout was reportedly higher than last year even with each of the large C-corps still sitting out of the event. That said, FERC and structure were clear overhangs. On FERC, we heard more questions than answers. Structure / simplification was discussed at nearly all our meetings and often overwhelmed the conversation. We think continued (and speedy) resolution around FERC / structural issues should help bring investor focus back to a strong fundamental set up, but there will be uncertainty in the meantime.
Last week we had the opportunity to meet with INGAA and the staff of FERC to review the latest on the changes on the pipeline regulatory policy front and the next steps to watch for. Overall we got a better understanding of the legal constraints FERC was under that led to the decision to change MLP tax policy to eliminate the tax allowance for cost based pipelines. We came away with the view that there is not much room to change the policy. In that context it is not a surprise that in front of the 501-G filings this fall that already many pipeline MLPs are moving toward corporate structures - SEP, EEP, WPZ, BWP, and TCP. Despite the MLP tax policy change being unwelcome, we still believe the acceleration of structural changes is a good thing for the sector.
The annual MLPA conference, newly renamed as the MLP and Energy Infrastructure Conference (MEIC), will be held May 22-24 in Florida. Many MLP management teams will be in attendance. This report is a helpful guide for investors attending and includes questions to ask for covered companies, as well as summary model information. Key industry topics are discussed below with company-specific topics in the body of the report.
Enable continues to exceed expectations and the Q1 beat and 2018 guidance raise builds on that trend. Growth projects – Wildcat, CaSE, Muskogee - remain on schedule and Enable also remains committed to a self-funding model, with comfortable coverage and no equity needs in 2018. Enable deserves a better cost of capital given its performance and solid balance sheet, but we remain concerned about the ownership structure with CenterPoint.
- 1 of 4
- next →