Momentum has no valuation ceiling while risks and uncertainties have no valuation floor. This is the story within utilities and among the market overall. A choppy Q2 due to unfavorable weather and weaker core sales growth seemed to only exacerbate this trend. A few companies appear to be re-rating on lower risk perceptions – ETR, FE, EVRG, SO, EIX, SRE – but otherwise we continue to see more divergence between the pure play safe regulateds vs those with diversified businesses or project/regulatory risk. Given our value focus, we are resigned to keep focusing on the messy ones.
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We are downgrading Cheniere Energy Partners to Peer Perform from Outperform. The partnership has been one of the best performing MLPs YTD and it trades expensive vs. its parent and 49% owner Cheniere Inc. Once Sabine 6 is completed in 2023 CQP's growth and distribution potential will have largely topped out and we don't see a big motivation for LNG to roll CQP up at current relative levels. Bottom line, we see LNG as the much more attractive vehicle at this point and it's hard to argue for CQP further rerating higher from current levels or our $45 target price (up from $42).
OGE reported 2Q19 EPS of $0.50, in-line with us/consensus at $0.51. Results were down $0.05 from the year prior primarily due to unfavorable weather. OGE’s slow start in the 1H was expected given drag associated with the Sooner/Muskogee projects. Both projects are now being recovered as of July 1st via interim rates. OGE affirmed its FY19 consolidated guidance of $2.05-2.20 but now expects ENBL’s contribution to be near the lower end of its $0.52-0.58 range.
2020 guidance uncertainty due to TX rate case, ENBL. CNP opted to not reaffirm its prior 2020 guidance of $1.75-1.90 due to some uncertainties as the company works to refine its expectations for next year. Our read was that the two key variables are timing / the outcome of the TX rate case and ENBL’s 2020 guidance. On the rate case, key issues are ROE and equity ratio. Possibility of a settlement sounded unlikely, though not off the table; a final order from the PUCT is expected in 4Q. ENBL will provide 2020 guidance on its Q3 call, the majority of which will depend on expectations for producer volumes next year in the Haynesville. That said, management reiterated that CNP’s 5-7% EPS CAGR through 2023 was still intact. CNP underperformed the UTY by 290bps following the report.
AES underperformed the UTY by 500bps today (08/06/19). This came despite no big surprises in 2Q results. AES reported 2Q EPS of $0.26, matching our estimate and a penny below consensus. FY19 guidance was narrowed to $1.30-1.38 and still targets the same $1.34 midpoint. There was a fair amount of questions on the call related to DPL’s DMR in light of the OH Supreme Court’s ruling which deemed FE’s illegal. But nothing we heard on the DMR was new. Perhaps some of the stock weakness was related to the DMR, but we think prevailing macro headwinds on trade issues is more to blame given AES’ emerging markets exposure.
CWEN reported 2Q19 EBITDA in line with consensus, but cut 2019 CAFD guidance by 7% as weak renewable conditions continued through Q2, and CWEN had a previously disclosed outage at the CVSR facility. We didn’t find the guidance cut surprising after renewable peers AGR and NEP reported. However, CWEN’s stock had a decent rebound this summer alongside declining interest rates, and a guidance cut is still a cut. Overall, we thought the Q2 update was somewhat constructive with progress on growth, new ROFO additions, and the PG&E situation still appearing to head toward a favorable resolution. Outperform.
The combination of continued regulatory drag and a bigger than expected f/x impact led to a Q2 miss but 2019 guidance of $5.70-$6.30 was reiterated on an expected rate case resolution. To the downside there appears to be more uncertainty on 2020 with management noting that the S. American asset sale and rate case will be key variables that are not yet known. That said we still see the stock trading at a discount to regulated peers with high quality utilities and significant upside potential from LNG; remain Outperform.
Quietly our Wolfe Yieldco Index has become the top income sector YTD and the only one beating the S&P 500 (see Ex 1). Yieldcos have overcome the huge uncertainty caused by PCG’s bankruptcy filing in January. Why have they done so well? 1) long-term contracts that are not subject to ROE resets like utilities so should benefit directly as interest rates fall; 2) the neighborhood improved meaningfully as parent companies changed from distressed owners to higher-quality parents (SunEdison to Brookfield, Abengoa to Algonquin, NRG to Global Infrastructure Partners); 3) Its Renewables stupid – the top growth space in energy with huge economic and tax subsidy momentum. While we are a bit wary of competition and financial discipline in renewables, we think the backdrop remains bullish. There is no better way to play all of this than NEP given their connection to industry leader NEE, huge growth backlog, cost-of-capital advantages and visibility on 15% dividend growth for at least the next 5 y
E&P concerns continued to rise this week after CXO announced a reduction in expected Permian production growth, adding to previous worries stemming from lowered production guidance by EQT and COG the week before. In this week’s report, we dive into the recent E&P weakness and how it may impact midstream moving forward. Now that we are roughly halfway through earnings, we also take a look at some trends that have emerged so far and our expectations for some of the companies reporting this week.
We are upgrading shares of Dominion to Outperform from Peer Perform and are boosting our price target to $82 from $79. At current levels D trades at a 3x discount to the regulated group, and over 2x after eliminating ACP completely from the picture. While we believe that D needs to continue to build on its solid track record of execution since last year, the combination of a cheap valuation even without ACP and a 5% yield (200 bp premium to the regulateds) makes D attractive from here.
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