We thought mgmt had a mixed tone at the meeting. They clearly laid out the strategy and upside potential on Permian pipes, but had a subdued tone on S&L. There’s a transition in the story here – mgmt. is emphasizing fee-based upside in Transportation and downplaying S&L, but there is still so much analyst / investor focus on the latter which is only 10% of EBITDA. Initial 2018 EBITDA guidance of $2,650M was in line with consensus despite a tepid S&L outlook. This was the meeting punchline – very impressive 16-17% growth in both fee-based and total EBITDA in 2018. And the market yawned. After recent disappointments, investors want to see the growth materialize. We see value in PAA units but think it’s likely too early to buy in and we lack enough conviction / visibility on the growth story. Peer Perform.
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We are initiating coverage of Enbridge Energy Partners at Peer Perform with a $19 target price. EEP is Enbridge’s US liquids MLP. Despite facing pressure from low commodity prices and high leverage the last couple years, EEP is in the process of restructuring to a purely fee-based/cost of service liquids transmission operation. This should result in a more stable cash flow profile and more sustainable balance sheet and distribution coverage metrics. This is clearly a positive development for EEP, but we are staying on the sidelines given the relatively low growth outlook for the next few years.
We are initiating coverage of TC Pipelines with a Peer Perform rating and a $60 target price. TCP is TransCanada's US pipeline MLP. It currently owns 6,000 miles of natural gas pipelines across the US, and its parent TransCanada has a significant set of eligible pipeline assets that can be dropped, bolstered most recently by the Columbia acquisition. That said, the parent has not articulated the longer term distribution growth story as well as other drop down MLPs, and distribution growth to date is lower than its peers. This is partially offset by the higher (6.8%) current yield.
We are initiating coverage of TransCanada with an Outperform rating and a US$53 target price (CAD$72). TRP is one of the largest energy infrastructure companies in North America, with an extensive natural gas and liquids footprint in both the US and Canada. Despite its strong growth prospects, improved business mix, and significant positive free cash flow position the stock only trades at an average multiple. We believe that TRP has established itself as a premium midstream name; Outperform.
We are initiating coverage of Enbridge Inc. with a Peer Perform rating and a US$43 price target. Following its merger with Spectra, Enbridge is the largest North American midstream infrastructure company with major oil and gas assets across US and Canada. We expect ENB to grow distributions above 10% well into the next decade as major projects go into service (Line 3 Replacement, Sabal Trail, Nexus). We further like their position in key low-cost regions like the Canadian Oil Sands and the Marcellus with very little commodity exposure. However, we remain on the sidelines given the (warranted) premium in current valuation, the complexity of the corporate structure, and the relatively high leverage.
Wolfe Research senior consumer utilities analyst Steve Fleishman alongside midstream analysts Alex Kania and Keith Stanley, hosted a webinar on their initiation of four companies today.
We are publishing a new model for ETE based on the post merger outlook. The merger has helped to stabilize ETP, maintained ample near-term cash flows up to ETE, and will ultimately lead to stronger cash flow growth at ETE. We forecast improving coverage over the balance of 2017 and a resumption of distribution growth in 2Q18 (when mgmt’s converts can also benefit). Based on our outlook for ETP, we think ETE could raise its distribution by almost 50% by 2019 to a 9% yield while maintaining >1x coverage. This investment proposition is appealing. However, the stock only trades at a modest discount to large cap peers on 2019 EV/EBITDA and P/DCF with leverage still elevated at 4.9x vs. 3.9x for peers. Overall, ETE is tempting to recommend, but we’re still not quite there and don’t see a need to rush in with a distribution hike still a year away and given execution risk on growth.
We are publishing a new model for ETP following the SXL merger. We have a constructive financial outlook as key projects like DAPL, Rover, ME2, and Revolution come into service, and ETP should benefit from operational leverage to Permian oil and NGL production growth. ETP has attractive thematic exposure to key basins and offers good diversification. The stock trades at a discount with an above average yield and big 2017 DPU growth.
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