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.
Search Coverage List, Models & Reports
Search Results1-10 out of 749
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.
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.
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.
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.
PCG’s $9B bankruptcy exit share issuance overwhelmed the whole sector in June adding another 6.8% to utilities underperformance. For the first half, utilities are down 12.6% and trailing the S&P 500 by 860bps. We have heard one thing after another to explain utility stock weakness – COVID concerns, credit concerns, the beta spike in utilities, bad technical, bad quant, inflation fears, equity overhang. None of these are compelling to us. We think this is simply a very narrow and semi-bubbly market focused on growth/momentum and on playing the recovery. Utilities have become lost in the shuffle. We view this as a gift – the chance to buy stable 9-10% total return utilities at a 10-15% discount to the market in a low rate, highly uncertain environment. We see the increasing chance of a Democrat win in the election as the biggest catalyst as utilities are a clear relative winner – both due to clean energy opportunities and less exposure to corporate tax increases. Finally, we see utilities leadership in renewables transition and electrification as long-term tailwinds that will only make the sector more attractive over time.
NEI held its annual briefing last week, with an optimistic tone on the state of nuclear and its role in the clean energy future, while advocating for properly valuing carbon-free electricity. Thus far, this has been recognized at the state level with several (NY, IL, NJ, OH, CT) passing legislation for nuclear support in recent years. But, a recent study sees one-third of the U.S. fleet as unprofitable/at-risk in the next decade. These subsidies have also created complications with broader competitive markets (ie: PJM’s capacity market MOPR). Long-term, most seem to be in agreement that carbon pricing is the direction to go, as the best way to maintain competitive markets while allowing states to pursue clean energy goals. But thus far, little progress has been made. That said, there has been some recent momentum on this front after earlier this month FERC announced it would hold a technical conference on the topic.
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 8% WoW and flat YoY for the week-ended 6/27. Relative to the 4-year average, demand was down 3%. This data looks relatively constructive, though once again weather is likely lending a helping hand. This is one of the better results we’ve seen on a YoY-basis since we began tracking the data in mid-March. Weather improved from last week’s below-normal levels. CDDs were up 15% versus last year and 17% versus normal.
Earlier this month, we hosted NextEra Energy CEO Jim Robo for a fireside chat. Most notable was Jim’s vision around hydrogen being the next wave of growth in the path to decarbonization; comparing hydrogen today to what battery storage was a decade ago. While the technology type is clearly in its infancy and the cost curve still needs to come down with improvements in technology, we decided to look back at when NEE first started discussing battery storage. The ramp in economics may not be directly comparable, but it could give a sense of just how quickly a new technology could start to materialize in a meaningful way.
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 down 3% WoW and down 2% YoY for the week-ended 6/20. Relative to the 4-year average, demand was down 9%. This was a step-back from last week’s encouraging trend, though weather is likely playing a big factor. This tied for the worst weekly performance versus the 4-year average since we began tracking the data in mid-March (last week was the smallest decline relative to the 4-year average). Weather was much more moderate than last week’s above-normal levels. CDDs were down 2% versus last year and 12% versus normal. See more detail within for charts and tables, as well as the slides that we will continue to update intra-week.
- 1 of 75
- next →