Expectations for oil prices have re-rated down since last quarter, but US volume growth remains bullish – particularly around the Permian. In a world where the two diverge, will midstream continue to be driven by oil prices? On the one hand, the Permian remains viable and growing at $45/bbl, driving incremental infrastructure opportunities. As a result, however, oil prices could be at risk in the near-term. We will be looking for updated commentary on 2018 outlooks – how much risk is there to growth slowing down if oil prices surprise to the downside? On the gas side, we continue to expect positive commentary on the Marcellus/Utica – but concerns around takeaway given project execution / FERC quorum challenges.
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KMI provided a surprise disclosure with 2018-20 dividend guidance of $0.80, $1.00, and $1.25. While this was actually below 2019-20 consensus of $1.21 and $1.58, we think the certainty is more important, the 6.4% yield in 2020 is close enough to peers, and the buyback explains the below consensus numbers. This ends the multi-year dance around when KMI will raise the dividend and by how much – removing one of the two pillars of uncertainty for the stock (the other is ongoing with TMX). The $2B buyback (5% of mkt cap) planned for 2018-20 surprised us despite recent market discussions. We’re not big fans. We get the flexibility it provides to defend the stock, but we think investors prefer more yield – reallocating the $2B to dividends would add 1.5%/yr to a still low yield. There’s also something unsettling about 5x levered companies buying back stock, though perhaps our long history covering the more volatile power sector shapes that view.
Investors are showing more caution on utilities today (7/19/17) with 26% expecting outperformance and 45% underperformance to year end. This flipped from our last poll in April which was 45% outperform and 36% underperform (this was when the Trump trades were unraveling). We think the utility caution reflects a more bullish market view and that the sector has held up relatively well. Within utilities, there has been a notable shift in the regulated vs power mix which had been overwhelmingly weighted to regulateds and now is more balanced. In Power, 38% are overweight in our poll vs only 5% back in April. Regulateds are down to 47% overweight from 76% in April.
The Wolverines comprise the top 3 stock ideas for each Wolfe analyst. TRP is our top Outperform name on the midstream side alongside NEP and GXP in utilities.
On Monday (6/19/17) EQT announced the purchase of Rice Energy for $6.7B, making it the largest natural gas producer in the US. We see the acquisition as a meaningful positive for EQM and EQGP, adding to EBITDA in 2018, boosting acreage for growth in the future, and providing opportunities for optimizing EQT’s midstream vehicles.
Enbridge held its first analyst meetings since the acquisition of Spectra last week in NYC and Toronto. The meeting was mainly to formally introduce the combined company’s broad platform, and there were only a few new details on the financial front. The stock underperformed around the meeting – the analyst day curse continues, and we think that there had been some hope ENB could hit its $5.50-$6/sh ACFFO guidance in 2019 even with the Line 3 Replacement coming into service later.
The annual MLPA conference will be held May 31-June 2. Management from much of our Midstream coverage will be there. This report is a helpful guide for investors attending and includes questions to ask each company and summary model information. Some of the industry topics we will be focusing on include:
We are downgrading KMI stock for two reasons. First, we now see it as more likely that KMI raises its dividend in 2H18 than 1H18, creating thesis drift in our investment case and possibly another disappointment vs. investor expectations later this year. Second, an announced 4-year agreement in British Columbia yesterday that the Green party will support an NDP-led government is bothersome, particularly with KMI’s Canadian IPO scheduled to close by Wednesday (5/31). Both parties oppose Trans Mountain (TMX), which is reported to have been a major issue in the decision. Overall, there are too many uncertainties and if KMI retains a below average dividend for another year, the stock would need to outpace peers by more than 5% on a price basis to outperform. That seems unlikely, downgrade to Peer Perform.
We hosted a bus tour last week visiting the CEOs of DYN, VST, and CPN; CFOs of NRG and CNP; and CCO of LNG. The meetings were timely coming right after the PJM auction and rising M&A discussion in the power space. The power sector is under tremendous stress but the companies are taking actions to counteract. Key takeaways highlighted below with more detail in the report.
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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