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.
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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.
In this week’s report we discuss our thorough review of CEO compensation in the sector and also give thoughts on upcoming earnings for the week ahead. On executive comp, total CEO pay was up a lot last year alongside generally strong financial performance but poor stock performance. In the report we show a lot of data on which CEOs are paid the most, different incentive structures, who is incentivized to sell, and other interesting tidbits from our review. For earnings, results last week were strong and we expect a continuation this week. We think ET should have a Q1 beat, the TRGP call will be important, and we should hopefully have news on the Capline reversal project for PAA. See the full report for details.
Earnings season shifts into full gear this week with 7 companies in our coverage reporting their Q1 earnings – ETRN/EQM, ENBL, EPD, OKE, MMP, WMB, and TRP. In this week’s report we highlight what to expect heading into the releases and key topics that are likely to be discussed on the calls. We have also revised our price target on KMI after updating our models with the 10-Q and latest thoughts. We reiterate our underperform and discuss key changes to our estimates, notably with regards to growth capex. For a more detailed discussion please view our full report.
We project YoY growth of 4% in DCF/share in Q1. This is attractive total return when combined with average 6-7% yields. The macro environment remains in somewhat of a sweet spot that should drive continued U.S. volume growth and infrastructure needs. Biggest Q1 beats include MMP, ET, and EPD.
On Wednesday( 04/10/19) President Trump signed two executive orders meant to promote pipeline infrastructure investment. While they highlighted an administration pushing hard for new infrastructure against state and legal obstacles, we don't see the orders as being game changers that would be the reason any particular pipeline moves forward or not. In this week’s report, we discuss Trump’s executive orders and the potential impact on pipelines under construction, particularly those related to WMB’s Constitution pipeline, TRP’s Keystone XL, and the broader New England and Appalachian regions. Please view our full note to learn more.
EPD will hold its Analyst Day on Wednesday (04/10/19) and we expect a heavy focus on the demand side of the equation (exports / petchem) as the key to driving growth up the value chain. A couple of potential new projects could be ripe for announcement, but we don’t think there are high expectations on this front. Commentary on NGL pricing, capex expectations, buybacks, and the old C-corp conversion topic are likely. Turning to M&A, Stonepeak’s $3.6B acquisition of the Oryx Permian crude gathering and intrabasin pipeline network last week marked the latest move by private capital to acquire midstream assets. We attempt to quantify a valuation of the deal in the report, which we think is attractive and a positive read-thru for PAA. From a sector perspective, private equity feels frothy to us and public midstream companies should be aggressively looking to take advantage by selling non-core assets or selling down assets through JVs to create value. See the full report for more.
This week we highlight three midstream treasure hunts – NGLs searching for demand, Waha gas in desperate need for a pipeline, and investors seeking capital discipline. Starting with NGLs, midstream investors watching oil steadily grind higher may not realize NGLs have lagged badly with pricing at 1-year lows relative to oil. We discuss our latest thoughts and potential for NGLs to recover later this year. Next we turn to Permian gas where pricing the past two weeks has only increased our concern that the basin will remain heavily constrained for a while with big downside risk to pricing. Lastly, we give updated thoughts on Permian crude takeaway in light of the MMP announcement. See the full report and charts for more.
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?
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