Energy Pair Trade: Bank Of America Upgrades TC PipeLines, Downgrades EnLink Midstream
- TC Pipelines, LP (NYSE: TCP) shares are down 40 percent year-to-date, while shares of EnLink Midstream Partners LP (NYSE: ENLK) have lost 51 percent.
- BofA Merrill Lynch’s Gabe Moreen upgraded the rating on TC PipeLines from Underperform to Buy, while downgrading the rating on EnLink Midstream from Buy to Neutral.
- The MLP environment is highly volatility and there are capital market concerns, Moreen stated.
Analyst Gabe Moreen maintained the price objective of $50. He said that TC Pipelines has a fee-based cash flow profile, which “should bode well in a persistent MLP environment of high volatility, capital market concerns, and focus on leverage.”
The partnership has low commodity sensitivity and its base cash flows are not dependent on the capital markets, which is a positive. Although TC Pipelines trades at a premium to the midstream MLP sector average, it is at a discount to peers with similar business risk profiles, Moreen mentioned.
TC Pipelines has an investment grade rated balance sheet, with the nearest-dated maturity in 2018. This offers “a degree of breathing room” in the near term before it needs to refinance debt.
“TCP's longer-dated maturities are currently trading among the best in sector at YTM’s of ~4.8%. TCP’s leverage ratio was 4.7x as of 3Q15 and we believe TCP can comfortably maintain leverage of <5x even without additional public common equity issuance in 2016/17E (excluding drop-downs),” the BofA Merrill Lynch report noted.
Moreen believes that TC Pipelines should trade at a premium to peers since:
- 95 percent of its revenues are supported by longer-term, take or pay contracts with minimal direct commodity exposure
- Investment grade rated balance sheet
- Drop-down potential from its general partner [GP] - TransCanada
- “Minimal growth capital beyond drop-downs and flexibility between GP support and TCP’s at-the-market issuance (ATM) to execute a moderate sized drop-down.”
EnLink Midstream Partners
Moreen reduced the price objective for EnLink Midstream Partners from $28 to $18. EnLink Midstream Partners and EnLink Midstream LLC (NYSE: ENLC) have recently announced the acquisition of Tall Oak Midstream for $1.55bn.
In the report BofA Merrill Lynch noted, “The acquired assets are backed somewhat by MVCs with DVN and are expected to generate $80mn in EBITDA 2016, expanding to $300mn by 2018 as ENLK deploys $650mn in capex over three years and MVCs and (potentially) drilling activity escalate.”
Moreen believes that EnLink Midstream Partners would be able to maintain its distribution at the current levels through 2017. The partnership does not seem to have “outsized” external capital needs and would not have to decide whether to defend its balance sheet or investment grade rating at the expense of its distribution.
“We forecast flat distributions through 2017 at both ENLK and ENLC, as we believe management will be prudent in building coverage instead of prioritizing distribution growth that ENLK is arguably not getting credit for even maintaining,” Moreen wrote.
Latest Ratings for TCP
|Jul 2016||Goldman Sachs||Assumes||Neutral|
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