Why Goldman Just Launched Sempra Energy At Buy, ITC At Sell, And 4 Other Utilities At Neutral
In a report published Tuesday, Goldman Sachs analysts mention that American Utilities continue to diversify into non-utility energy infrastructure, with Diversified Utilities seeking higher growth than their core regulated businesses.
The analysts initiated coverage of three Diversified Utilities with non-utility gas midstream with a Neutral rating - CenterPoint Energy, Inc (NYSE: CNP) (with price target at $20), DTE Energy Company (NYSE: DTE) (with price target at $82) and OGE Energy Corp (NYSE: OGE) (with price target at $33).
ITC Holdings Corp (NYSE: ITC), among the Diversified Utilities with federally regulated electric transmission, was initiated with a Sell rating and a price target of $34.
In the report Goldman Sachs noted its key takeaways as:
- SRE emerges as our most attractive infrastructure story, with material upside from MLP/Yieldco formation and LNG expansion
- our out-of-consensus view on Sell-rated ITC, where we expect a more material reduction in regulated returns coupled with tapering growth; and
- general partner (GP) call options exist among Diversified Utilities with MLPs, some of which are pricing little to no value for GP interests.
"Diversification into non-utility energy infrastructure is a growing trend among Diversified Utilities seeking higher growth relative to their core regulated businesses."
Among the companies that are investing in energy infrastructure, the analysts favor the following attributes:
- Competitive Advantages in Favorable Markets: This suggests exposure to attractive markets (Marcellus/Utica and Mexican infrastructure), brownfield assets (LNG import terminals, Gulf Coast storage), and low cost of capital from existing or potential MLP/Yieldcos
- Earnings and Growth Visibility: This suggests a stable regulatory environment with limited risk, long duration contracts with limited commodity exposure, and backlogs of high-quality projects with additional upside from high-probability projects
- Capital Allocation Winners: The analysts like companies that are capable of investing in above-market returns and return capital to shareholders via above-average dividend growth and the potential to return excess cash to shareholders
- Near-Term Catalysts: The analysts like companies that have growth upside from near-term development projects wins and strategic options such as MLP and/or Yieldco formation.
"Our in-depth analysis reveals SRE as our favorite infrastructure pick with material upside based on 1) our above-consensus earnings forecast (13% CAGR); 2) MLP/Yieldco formation upside ($13/sh); and 3) LNG expansion not in our forecast ($28-49/sh for 4-7 trains)," the analysts added.
Latest Ratings for SRE
|Jun 2016||Goldman Sachs||Downgrades||Buy||Neutral|
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