UPDATE: Wunderlich Upgrades DCP Midstream Partners

Wunderlich upgraded DCP Midstream Partners, L.P. DPM from Hold to Buy and raised its price target from $56 to $57.

Analyst Jeff Birnbaum commented that “Despite concerns over ongoing commodity exposure, we see DPM beginning a transformation that could lead to modestly higher distribution growth vs. the current 7 percent rate, particularly in an improving commodity environment.

“With increasing organic capex projects and more dropdowns to come in 2015-16 (we forecast $1.5B/year), DPM's "flywheel effect" should turn up a notch.”

Birnbaum also believed that “returns on invested capital are set to increase as organic investment drives a greater proportion of growth, additional fee-based projects, and dropdowns are added (driving DPM to 70 percent fee-based by 2017), and as returns on Sand Hills, Southern Hills, and even Front Range improve.”

“The price target was based on a distribution discount model, complemented by analyses of peer comparables, target yield, and LP cash flow multiples. We assume an 8.3 percent cost of equity, 9.5 percent terminal cost of equity, and 2 percent terminal growth rate,” according to the analyst note.

Birmbaum concluded by forecasting a "5-year distribution CAGR of 8 percent with distribution coverage averaging 1.1x. With a 6.6 percent current yield, we believe DPM units present an attractive mix of income and growth today.”

DCP Midstream Partners, L.P. recently traded at $47.04, up 0.13 percent.