SEP continues to have one of the lowest risk sets of assets in the group - largely demand-pull pipelines under long term contracts with minimal commodity risk. Moreover, there is good visibility on growth projects into 2019, and we expect that Enbridge will keep SEP as its primary US natural gas platform. That said, we don’t expect specific EBITDA guidance and a long term update on SEP from Enbridge at least until ENB’s Q1 call, if not at the ENB analyst day in June. We will be interested in how ENB looks at the integration of Spectra overall, as well as SEP. Valuation looks reasonable at current levels; reiterate Peer Perform.
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We reiterate our Outperform rating on EQM and EQGP. EQM has one of the best growth profiles in the sector driven by long term, fee-based contracts on both gathering and transmission. These should support ~20% distribution growth at EQM and ~40% distribution growth at EQGP. Bolstering the quality growth story is a minimal need for external equity given the underlevered balance sheet and a strong sponsor in EQT.
We reiterate our Outperform rating on DM. DM has best in class distribution growth potential, a high quality backlog (LNG and long haul pipelines under long term contracts), and a strong parent with an interest in ensuring its success. The Questar Pipeline drop and financing last fall was highly successful and takes capital market risk off that table for at least 18 months. This lower risk plus 22% distribution growth is highly attractive; Outperform.
EPD had a strong Q4 update. They are moving forward on an iBDH project, which we estimate to be an ~$800M investment backed by long-term contracts on 50% of output with the rest helping to boost existing assets. Midland-Sealy was formally upsized by 150 MBPD and now has almost 300 MBPD of contracts (180 previously) - returns on the project look strong. And EPD still seems close to announcing a Centennial NGL pipe project and other investments in Permian gas / NGLs. Put simply, EPD's integrated business and low cost of capital are enabling incremental attractive growth, which is differentiated in an oversupplied midstream industry.
The Analyst Day message was as expected. KMI is focused on improving the balance sheet through asset sales and JVs, while positioning for gas pipeline growth around LNG and exports to Mexico. Mgmt reiterated they like the CO2 / EOR business, but did not rule out a sale at a time of renewed interest amongst investors as the assets are listed as for sale on an industry marketing website. We think KMI would only sell at a very strong price. KMI seems close to a sell-down of Elba LNG, noting they have received bids. They do not expect to pay material cash taxes until 2024 (previously 2022). Lastly, the tone on Trans Mountain remains confident. KMI is seeing good interest from potential buyers with an expectation for an upfront promote, while the cost estimate is up only 5-10% from a few years ago.
We thought KMI had a positive update on the Trans Mountain project (TMX). Regulatory approvals are in hand and mgmt. is confident legal challenges will fail. KMI will have final costs in early Feb – currently around US$6B per commentary on the call, which we view as a manageable 11% increase vs. the estimate several years ago. Shippers will have 30 days to re-commit to the project and KMI thinks its total committed volumes will be at or above the current level. The economics remain strong – lower than 6.7x EBITDA. A final investment decision is expected in late Q1 / early Q2 and KMI indicated a JV sell-down or Canadian IPO could be announced around the same time. The company stated it is seeing a lot of interest in the project. Reiterate Outperform – a successful sell-down of TMX should allow KMI to reach its balance sheet target by YE 2017, allowing for a big dividend hike in 2018.
Wolfe Research Senior Utilities Analyst, Steve Fleishman, with Midstream analysts Alex Kania and Keith Stanley hosted a webinar to discuss their top 10 picks for 2017.
Will MLPs trade with energy (oil) or income sectors (bonds)? Oil prices and rates have both been going up. We think MLPs continue to trade more with energy (oil) than rates in 2017, just as they have post election. MLPs are a risk-on income sector – that’s a good thing for portfolio diversification. MLPs may be due for a catch-up trade vs. the XLE based on history after two years of underperformance.
We believe this is the case, and the returns are impressive. We asked each of our top senior analysts for their top three ideas, either long or short, over the next 6 month period and here are the results for the past 3 years.
After market close (12/5/16), KMI released its initial high-level 2017 outlook. EBITDA of $7.2B is right in line with our $7.205B estimate, though DCF of $4.46B is 1-2% below our expectation. That said, the outlook may be viewed as light vs. consensus expectations which were higher. KMI sees YE 2017 debt / EBITDA of 5.4x, in line with our model and flattish vs. 5.3x in 2016. The outlook bakes in funding from a 50% JV partner on TMX (we estimate $300-400M) – importantly, this only improves debt / EBITDA by 0.05x. We like KMI on value and the dividend growth story, but think near-term performance may be held back until the company executes on catalysts in Q1. The company could provide more clarity at a conference tomorrow morning.
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