This morning (11/16/2017) TransCanada detected a pressure drop on the Keystone liquids pipeline and identified a leak of approximately 5,000 barrels in northeastern South Dakota. The leak was quickly isolated and contained, and water sources were not affected. The cause is now being investigated, and the pipeline will remain shut until repairs allow safe operation. Pipeline leaks are clearly never good things but this event comes four days before the Nebraska PSC is set to rule on a permit for the Keystone XL line.
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Next year is shaping up to be Cheniere’s expansion year. It continues to advance long term contract discussions, has secured an MOU with CNPC, and in a sign of confidence in ultimately reaching FID, LNG will start early-stage work on Corpus 3. At the current price we see LNG as a free option on expansion, with significant upside even on just one new train. Outperform.
TransCanada remains well positioned to benefit from natural gas and liquids infrastructure growth in the US and Canada. The secured growth projects are low risk, with either utility-like return certainty or long-term fixed price contracts. The stock has performed relatively well vs the group and it now trades at a modest premium. We believe that TRP has established itself as a core midstream name, and its low risk profile and strong potential for growth upside deserves a stronger premium; Outperform.
ETP had a strong Q3 that came in above expectations (see p. 3). We got a full quarter of growth from DAPL and other projects like Rover, ME 2, and Revolution will still be additive over the course of 2018. At the same time, commodity prices / volatility have moved higher which should benefit future periods. Financial results are gaining momentum. On equity, ETP reiterated no ATM issuance is expected thru mid-2018, and this “no equity” window may be extended further as ETP taps the perpetual preferred market.
Q3 was a solid beat with EBITDA of $1,744M, above our $1,700M and further above $1,666M consensus. DCF/coverage of $1,049M / 1.13x were strong. ETP had gains on legal settlements of about $15M. The beat versus our forecast came from the Other segment where the PES refinery and SUN saw better results. Intrastate and Interstate were also above expectations. The Crude segment saw big YoY EBITDA growth of $227M largely from the startup of DAPL (which is consolidated), although this was roughly in line with our forecast. The one negative was Midstream where EBITDA came in light vs. our expectations and down $56M QoQ versus a strong Q2. Volumes were mixed overall with strength on the gas side but somewhat softer than expected volumes in midstream and NGLs (possible Harvey effects). On the ETE side, DCF of $271M and coverage of 1.05x of the recently increased distribution was right in-line with our estimates.
PAA’s earnings call was the best we’ve heard in a while. There were no material hiccups, the core Permian story is moving forward, non-core asset sales are on target with more sales possible, and PAA was optimistic on moving forward with Cactus II possibly through a JV. They are committed to the de-leveraging plan and don’t see a need for equity in 2018 even if they pursue incremental growth investments. Mgmt. downplayed the potential for acquisitions, and didn’t bite on potential S&L upside from recent commodity moves while refocusing the call on the higher value fee-based businesses.
TC Pipelines continues to grow cash flows at a steady pace with Q3 benefiting from the recent additional interest in Iroquois. Its parent TransCanada has a significant set of eligible pipeline assets that can be dropped over time. That said, its distribution growth outlook is low relative to other dropdown stories and the parent has not articulated the long term outlook for TCP as clearly as its peers. The high current yield makes up for this to some extent, but we see it as fairly valued. Reiterate Peer Perform.
PAA’s 3Q17 EBITDA of $489M beat our $455M estimate and $443M consensus on stronger than expected results at Transportation alongside higher Permian volumes. Q3 DCF of $299M only beat slightly as Facilities segment capex was very high again. The strong Q3 results and reiteration of FY EBITDA guidance are a welcome relief after PAA cut guidance twice earlier this year. That said, FY 2017 DCF guidance was reduced by $40M on higher maintenance capex and taxes.
EPD stock fell 2% today, in line with the AMZ. We thought Q3 results were neutral overall, some positives (NGL pipes / storage) and some negatives (crude marketing). More importantly, EPD indicated they do not expect to issue equity except for the DRIP in 2018 ($300M/yr). This was incremental to the message on last month’s call that they would be self-funding starting in 2019. EPD is effectively self-funding today as presumably investors who participate in the DRIP aren’t actively selling units. Peers MPLX, ENBL, and TRGP saw their stocks rally after favorable commentary on equity funding needs, but EPD continues to struggle. Peer ENB’s open ended answer on its call today to questions on dividend policy seemed to bring down the group. This re-highlighted the slowing growth theme in midstream, which EPD has unfortunately been associated with after its distribution call. That said, we continue to have high conviction that EPD will show above-average growth in 2018 – we see 12% YoY growth in distributable cash flow per unit.
Enbridge fell 4% for the day (11/2/2017) after reporting Q3 results. While numbers were slightly lower than consensus expectations, the main reasons for stock pressure were 1) concerns around the company’s ability to meet full-year ACFFO guidance and 2) an open ended answer to questions on the dividend policy. We think the stock could remain relatively soft until the December analyst day, when the company will provide more color on the long-term growth potential of the combined entity and the dividend outlook to 2024.
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