On Monday (4/16/2018), the Minnesota PUC ALJ will issue a recommendation on Line 3 Replacement, a key project in ENB’s growth backlog important for meeting long term DCF and deleveraging goals. We think a recommendation for L3R is more likely, though we expect the ALJ will include conditions. Key will be what the conditions are and what impacts they may have on the costs or economics of the project. We believe investor expectations assume L3R moves ahead so there could be downside risk in the event of a recommendation against the project. Regulators will rule in the summer.
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We thought KMI had a very positive Q1. Results were a nice beat on strong gas volumes and full year results appear ahead of plan. Most importantly, KMI added $900M of new growth projects to the backlog in Q1 in the gas pipeline and midstream businesses. A lack of growth has been the biggest issue for KMI’s stock, in our view, as the company only added $800-900M to the backlog for all of 2017. Returns are attractive as the average EBITDA multiple on growth projects fell to 6.0x from 6.7x. We remain Peer Perform rated. However, if KMI can continue to find new attractive investments over the next few quarters, we think valuation can re-rate higher.
KML remains highly disciplined and conservative around moving ahead on TMX. There are discussions ongoing with the federal gov’t around financial support (investment, backstop, etc). However, mgmt. made it clear that they also need other unspecified support – possibly legislation or other actions – to help mitigate B.C. risks and keep TMX going past the 5/31 deadline. Kinder has effectively created a crisis moment for politics in Canada forcing leaders to show their final hands, but we’re not confident there’s an easy fix. After plunging on KML’s announced suspension of TMX last week, the stock has rallied hard and is only 2.4% below its pre-announcement level. We stay Peer Perform rated but do worry investors may be getting ahead of themselves as a path forward is still uncertain and ongoing risks remain.
KML will suspend all non-essential spending on the Trans Mountain pipeline (TMX). KML will seek an agreement with stakeholders by 5/31 that gives greater clarity on 1) the ability to construct through B.C., and 2) adequately protects shareholders from risks. Absent an agreement, KML will likely walk from the C$7B project, of which C$1.1B has been spent. Recent news flow for TMX had been positive with supportive comments from federal officials and tough actions by Alberta, so investors may be surprised by the timing.
Previously we downgraded DM to Peer Perform from Outperform. FERC’s recent action on tax added another layer of uncertainty on MLPs. While not directly impacted by the tax policy change near term, DM is one of the MLPs most reliant on equity market access to fund drop downs and grow the distributions over the next several years. The weakness in the valuation of DM makes the dropdown math harder to work, leading to a further downward spiral. Given that Dominion has a priority of parent debt reduction, it is unclear how much support it can give to DM. The next couple months are key - Cove Point goes into service and D will look to find a way to kick start the growth – but at this point it’s hard to have any conviction on DM’s future.
Wolfe Research's Senior Utilities analyst, Steve Fleishman, hosted a Fireside Chat with Cheniere Energy EVP & Chief Commercial Officer, Anatol Feygin.
FERC’s proposed policy change to no longer allow MLPs to recover a tax allowance in pipeline rates is an unwelcomed overhang. The timing is bad. Fundamentals had just turned more positive and Q4 results were strong, but stocks have lagged due to a lack of sustained investor sponsorship and MLP fund inflows. Near-term, the new uncertainty and downward rate pressure created by FERC’s move hardly seems likely to now inspire new buying interest in the space. We think the 4.6% drop in the AMZ is a little overdone on a fundamental basis. That said, relative stock moves seemed generally rational with C-corps outperforming and more exposed MLPs down the most.
Wolfe Research Senior Utilities & Midstream Analyst, Steve Fleishman and Midstream analysts, Alex Kania and Keith Stanley, hosted a webcast discussing FERC’s order on taxes for MLPs, Merits of C-Corps vs. MLPs and initial thoughts on company implications.
The Analyst Day started with CEO Jim Teague humorously pausing in his opening remarks, taking out his phone, and telling his broker to buy EPD stock. Turned out he wasn’t kidding – a form 4 shows a ~$500k purchase. Mgmt is frustrated that EPD’s strong growth outlook and Q4 financial results haven’t translated into better YTD stock performance. Overall, we came away from the meeting with increased confidence in the medium-term growth outlook. EPD highlighted several potential projects that would be incremental to the current backlog (see p. 3 for details). However, with no new forward-looking financial disclosures to point to, the meeting itself may not provide a near-term catalyst for the stock. We think investors should be patient and we remain confident EPD’s demand-focused platform will generate superior value over time. Reiterate Outperform.
Wolfe Research's Senior Utilities Analyst, Steve Fleishman, joined by Senior Midstream Analysts Keith Stanley & Alex Kania, hosted a webcast to discuss post-earnings takeaways, top ideas, themes and catalysts.
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