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Our annual utility and power conference is fast approaching. This year we have added an oil/gas day led by the Wolfe energy teams. Participating companies are on the right and there is still time to register (here). The conference provides a unique mix of company presentations via panel discussions and 1x1s that feature management/industry leaders. This report provides a list of questions to ask companies and includes model summaries. Below are industry themes expected to be addressed.
PAA announced a 45% distribution cut to $1.20/unit after market close on Friday (8/25/17). The cut is notably larger than the theoretical $1.80 presented by PAA when it initiated its leverage / distribution review 3 weeks ago and below our $1.50 projection. The distribution is now 57% lower than in mid-2016 before PAA’s prior cut. Excess cash will go to repay $1.4B of debt and get back to targeted leverage metrics by YE 2018. The extent of the cut was yet another surprise. But we agree with the move to focus on leverage first and then resize the distribution later. PAA is finally taking bold action.
After market close, ETP announced a 54M unit equity offering (62M with underwriter option). Bloomberg reports the range at $18.65 – $19.45/unit, implying a $1.0B - $1.2B issuance. ETP expects the offering to eliminate the need for incremental equity thru mid-2018 beyond the DRIP ($400-500M/yr). This is more equity than the $700-800M of issuance we had assumed through mid-2018 excluding the DRIP. The offering should fully remove any remaining equity overhang fears in the stock, which could be viewed positively, although investors may still be wary about the mixed messaging.
ETP had good Q2 results and had a very strong call – a notable shift from peer PAA’s results on Monday (8/7/17). Capex guidance was a little high, but ETP emphasized flexibility on sources of equity that suggested ATM / DRIP issuance should be sufficient, and we were encouraged the Rover sell-down could close by October even if the pipe is not yet completed. CEO Warren acknowledged that mgmt. is tired with little appetite for acquisitions and a focus on project execution. We see potential for a transition to “smoother times” which could lead to a re-rating in ETP / ETE equities which we view as a good value. But we do not think the timing is right to push high beta midstream stocks, lack conviction that project issues have been put to bed, and are cautious on the terms of a future ETP / ETE roll-up. Peer Perform.
Cheniere had another positive quarter, beating consensus and boosting 2017 guidance. Cheniere continues to execute both on operations of the three trains and on construction of the remaining four. Finally LNG is the best positioned US exporter for future expansions. We see the stock trading at a discount just on the seven trains, and it has significant additional upside potential as it moves forward on expansions. Outperform.
After market close yesterday (8/7/17) , PAA dropped a bomb, lowering 2017 EBITDA guidance by another $185M ($155M S&L, $30M fee-based) and building in $200M of downside risk to 2018. This followed a guidance cut with Q1 and a reiteration of that guidance at the Analyst Day in late May. Mgmt tried to explain what happened, but it just sounded like more of the same of what we heard in May. A Board review was started to revise the distribution policy to better tie to fee-based cash flows. This makes sense, but was a negative surprise after mgmt just reassured investors on the distribution last quarter. Investors will be disappointed, and trust may take a long time to rebuild
Q2 results missed on weaker crude marketing margins (see p. 4 for details). The update wasn’t great with PDH now not at full run-rate until year end and ethane export volumes running behind. That said, strategically we like the continued focus on the downstream demand-pull side of the equation as a way to secure a competitive advantage across the integrated platform. The potential to move forward on ethylene exports moved back on the map and seems likely. Despite some hiccups in 2017, we think investors may underappreciate how well EPD is positioned for growth in 2018 and beyond.
Enbridge reported solid Q2 results that keep it on track for the year. The company continues to have a vast ($31B) investment backlog that will help drive 10%-12% dividend growth through 2024. This combination of high growth and long duration is largely unmatched in the sector. That said, the stock trades at a sizable premium to the midstream group – we believe this is warranted but we also see the stock as fairly valued; Peer Perform.
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