For the second straight year, FERC tried to steal the spotlight from the NCAA on the first day of March Madness, but this year the consequences were not nearly as drastic for midstream companies. FERC opened an NOI for the ROE rate setting process for oil and gas pipeline companies. Among other questions, FERC has asked for stakeholders’ opinions on the validity of the current two-stage DCF methodology and whether or not to incorporate CAPM, risk premium, and expected earnings models. As FERC awaits feedback, investors are contemplating the possible outcomes. Could the expanded approach impact ROEs significantly? When would the proposed changes come into effect?
Search Coverage List, Models & Reports
Search Results1-10 out of 40
We’re hearing a more cautious tone on the group overall after a strong start to the year. Q4 earnings were mixed and mega project risks are front and center on investors’ minds. The C-corps keep outperforming the MLPs and most dedicated midstream investors aren’t sure why. Perhaps we’re seeing new generalist buyers? We’re also hearing consistent debates on a number of key stocks from investors. Please open the full report for details.
We thought results in Q4 were solid with an average EBITDA beat of 3%. DCF/share growth of 8% YoY in Q4 was down from the breakneck double digit growth seen in Q2 (13%) and Q3 (18%), but is clearly still attractive total return when combined with safe 7% yields. Our updated forecasts still call for 5% DCF/share growth in 2019, preserving a low double digit total return investment proposition. That said, the group now seems more dependent on a valuation call near-term given more uncertainty over the pace of production growth and concerns over high levels of competition and a cyclical shift toward potential overbuild.
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.
Our EBITDA estimates for Q4 are close to consensus overall and we forecast DCF/share growth of 8% on average (5% median). While not as robust as the wild 18% YoY growth in DCF/sh reported in Q3, we see continued momentum in Q4 from strong volume growth and new infrastructure investment despite some modest commodity pressures. As we wrote in our year ahead report, the group offers an attractive value proposition with 7% yields plus mid single digit growth, while a larger exposure to production volumes than commodity prices should differentiate midstream results vs. broader energy in 2019.
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.
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.
While there weren’t any big announcements at TRP’s analyst day on Nov. 13 we thought the meeting was constructive. The messaging of 8%-10% growth through 2021 while minimizing equity and keeping leverage sub-5x was as we expected, though it was clear that TRP has a lot of growth momentum beyond 2021. We continue to see the stock as attractive on both earnings and EBITDA given the growth potential and low-risk locked in cash flows. Outperform.
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.”
- 1 of 4
- next →