KMI filed a preliminary prospectus for the IPO of a minority stake in their Canadian assets inclusive of the US $5.5 – 6.0B Trans Mountain project. The IPO is consistent with plans to assess value thru both a JV and IPO, and the NewCo was incorporated on 4/7 (before the Q1 call). The NewCo would offer both significant growth and single project risk on TMX – offering high risk and high reward. We think an IPO would complicate KMI’s simple story (corporate structure, one security) and is not as ideal as a JV. But, after reviewing the filing, we think a Canadian IPO could be a viable alternative to bring in significant upfront cash and reduce leverage with a goal of raising the dividend in 2018. See our analysis of potential IPO proceeds on p. 3 under various assumptions. A JV / IPO decision is expected by the end of June, although the 5/9 B.C. election will be the next data point.
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We like PAGP’s thematic appeal as a large cap Permian play and forecast $350M of EBITDA upside from volume growth on Permian pipes by 2019 – in line with operational leverage guidance. But PAGP still trades at a premium in 2019 even on our constructive outlook, while rising competition and low barriers to entry remain risks that can dilute the upside case. We would need to assume PAGP’s pipes run full to see material upside in the stock. On the Permian, we think both production upside risks and midstream competition are rising. See our PAA report for a more detailed analysis.
We like PAA’s thematic appeal as a large cap Permian play and forecast $350M of EBITDA upside from higher volumes on Permian pipes by 2019 – in line with PAA’s operational leverage guidance. But PAA still trades at a premium in 2019 even on our constructive outlook, while rising competition and low barriers to entry are risks that can dilute the upside case. We would need to assume Permian pipes run full to see material upside in the stock. On the Permian, we think the production outlook and midstream competition are both rising. PAA would be well served to lock in contracts on new growth (Basin). But the 1,800 MBPD of new potential takeaway capacity announced this year are concerning for PAA’s upside story. Lastly, we see Midland basis widening toward walk up rates this year but blowouts seem unlikely.
We thought Cheniere did what it needed to do at the analyst day - highlight the successful transition from development to significant locked up free cash flow generation and show that it is positioned for additional growth LT. Even though the stock was down on the lack of a big announcement (and likely oil), we believe the meeting set a framework for investors to build off of. We believe the stock is cheap just on the seven trains, with significant upside potential from growth projects. It remains a top pick - Outperform.
KMI had strong Q1 results slightly ahead of expectations. Volume data was good – gas gathering flattened out QoQ and crude / condensate rose for the 2nd straight quarter. We think 2017 financial results are tracking slightly ahead of plan. The >$1B Gulf Coast Express project sounds promising and would be a nice boost to the backlog. But the elephant in the room is still outstanding with resolution of the TMX sell-down process now possibly delayed until June vs. prior late Q1 / early Q2. We like KMI stock on the deleveraging / dividend hike story. A favorable sell-down of TMX materially reduces leverage and is the key catalyst for the story to play out.
The main question we get on utilities is why they are holding up so well with a bullish stock market and rates creeping up. Our investor poll highlights some interesting changes - 44% now see utilities underperforming in 2017 down from 67% in the prior poll; the U/W is shrinking. Tax reform timing has shifted with 60% seeing it as a 2018 event vs 38% last poll; and 79% see the final bill not including the loss of interest deductibility provision (the worst one for utilities). Finally, over 64% of investors see rates staying in the 2.5%-3% range which is modestly higher but not enough to re-rate utilities. Bottom line is that investors are increasing doubting the timing and impact of the Trump/Republican growth agenda given recent stumbles. SRE is the top overweight which surprised us since investor interest has been quieter. SO is the top underweight.
The Analyst Day was a clear reminder of why it’s so easy to like EPD. Mgmt professes to spend as much time on the demand side of the equation as supply. The demand-side strategy in petrochemicals and exports during a low price period has helped to diversify the company and stabilize prices. The export story is going very well – LPG exports are at capacity and ethane exports are above expectations in Q1. We like the integrated model and lower risk balance sheet, and think EPD sounds more disciplined than others as they pursue growth. Valuation remains attractive. Reiterate Outperform.
Cheniere’s Q4 call was upbeat: operations of SPL 1 and 2 have been good, construction schedules for the remaining units are on track, and progress is being made on growth opportunities. Sabine 3 and 4 are set to go commercial in 2017 (SPL 3 will start 3 months early), with the remaining trains still set for 2019. LNG management was encouraged on progress being made on expansion trains as well as the MIDSHIP pipeline – but it still appears relatively early for anything specific. We believe the stock remains attractive – we see upside on declining risk as more trains go into operation, as well as from the potential for growth opportunities. Reiterate Outperform.
Cheniere released its 2016 10-K in advance of its yearend earnings call to be held on Tuesday (2/28/2017). LNG reported a GAAP loss of $610M in 2016 vs. a loss of $975M in 2015. The results imply positive net income for Q4-16 of about $110M, suggesting a solid beat on EBITDA vs. our $155M estimate and $168M consensus. Growth vs. 2015 was due to Sabine Pass 1 and 2 going into operation. The results appear encouraging and we will be looking for more detail on Tuesday. We reiterate Outperform; LNG continues to get more attractive as it moves forward on its development plan.
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