Our initial note title on the D midstream sale was “Short-term pain, long-term gain”. Last week, we saw the short-term pain with D stock down 11%, while the sector finished flat – the 30% dividend cut particularly hurt the stock in our view. Looking ahead, we believe the market will start to focus on the long-term gain. We like the entry point with the stock trading less than a 1-turn premium to the average regulated and with 2 major catalysts into year-end: 1) the GREEN trade into a potential Biden win in the election – D is one of the only clear plays on this in utilities and it’s the cheapest of the ESG winner peer group; and 2) share repurchase kicker with $3B to be done by YE (5% of shares). We upgrade D to Outperform from Peer Perform and raise our PT to $80 reflecting better sector multiples.
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The Wolfe Utilities & Midstream team hosts a webcast on Fridays at 11:00AM ET to discuss utilities & power news and themes for the week. Presenting analysts include Steve Fleishman (Utilities & Power), Keith Stanley (Midstream), and Alex Kania (Midstream).
Today (7/6/20), D’s stock fell 11% and underperformed the UTY index by 950bps. The move came as the market grappled with significant EPS dilution and a dividend rebasing as a result of D’s decision to sell its Gas T&S assets to Berkshire and cancel ACP (see note). In addition, we sensed a little wariness over the new plan D laid out despite solid execution over the past few years. Our view of the two moves is unchanged – we believe it was the right call L-T as it further supports and likely accelerates D’s ESG re-rating. We expected the stock to pullback given that the implied valuation on D’s new earnings profile suggested a multiple in-line with the highest quality names in the sector. However, we believe the extent of today’s move was overdone.
Last week, the majority-Democrat House of Reps. passed a massive infrastructure bill largely along party lines. It includes significant provisions for clean energy investment, as well as tax credit extensions for wind (5 years) and solar (6 years). Other areas of focus include electric vehicles and energy efficiency. However, with the currently majority-Republican Senate and President Trump, this is highly unlikely to go much further. That said, current odds are showing a greater than 60% chance that Joe Biden is successful in his presidential bid and that the Senate flips to a Democrat majority. Infrastructure/climate would be top priorities in a Biden administration.
We’re updating our commentary on U.S. power demand in accordance with updated EIA data, as well as the latest weekly weather data from NOAA. Power demand was up 4% WoW and down 2% YoY for the week-ended 7/4. Relative to the 4-year average, demand was flat. This was an encouraging result as COVID cases have started to spike in certain big states. This was the best result we’ve seen versus the 4-year average since we began tracking the data in mid-March. Weather was more favorable than normal, but slightly milder than 2019, resulting in a tough YoY comp. CDDs were down 4% versus last year and up 21% versus normal. See more detail within for charts and tables, as well as the slides that we will continue to update intra-week – link.
Wolfe Research's Senior Utilities Analyst Steve Fleishman and Midstream Analysts Alex Kania & Keith Stanley hosted a webcast to discuss D Midstream Sale, D/DUK ACP Cancellation and Implications for Midstream
The PCG bankruptcy has been a key issue for CWEN stock for much of the time since GIP became the sponsor in August 2018. With PCG’s exit from bankruptcy last week, investors can now better focus on the core income + growth story with an emphasis on clean energy.
Cutting our DUK 2020-23 estimates after ACP cancellation announced. Potential for incremental utility and renewables capex to mitigate earnings hit, but timing unknown.
This afternoon, D announced a substantial repositioning of the company via a sale of its Gas Transmission & Storage assets to Berkshire Hathaway Energy. The transaction was valued at $9.7B, which includes the assumption of $5.7B of debt; D will retain a 50% ownership in Cove Point. In addition, D and DUK announced the cancelation of ACP.
The Wolfe Healthcare team lead by Senior Healthcare Services Analyst, Justin Lake hosted a webcast to discuss thoughts on MCOs Into 2020 Elections. Scenario analysis on MCO Implications for Biden win with or without Dem sweep of Congress. Outline potential impact of tax reform. Why we think Public Option is unlikely but manageable for MCOs under most circumstances
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