MLP Midcoast Energy Double-Downgraded By Credit Suisse After 20% Selloff

Credit Suisse’s John Edwards downgraded the rating for Midcoast Energy Partners LP MEP from Outperform to Underperform, while reducing the price target from $16 to $5. He noted that while the company made good progress in 2015, it was inadequate in the face of its rapidly deteriorating fundamentals.

A continued decline in Midcoast Energy’s fundamentals resulted in the stock plunging 21 percent on February 17.

Midcoast Energy reported a better-than-expected 4Q15 adjusted EBITDA of $27 million, but its DCF of $16 million fell short of expectations due to high maintenance capex and interest expenses.

The company’s guidance for 2016 came in 39 percent lower than the consensus expectations. Midcoast Energy needs $40 million of Enbridge Energy Partners, L..P EEP support to pay its 2016 distributions, Edwards said.

“[W]e see the following potential scenarios: 1) EEP generously supports MEP distributions beyond 2017; 2) EEP buys MEP back in (difficult given capital markets and EEP's own stretched financials); or 3) MEP cuts its distribution after the 2016 subordination period,” the analyst wrote.

Although a distribution cut would make sense as it will allow the company to protect its balance sheet for a little longer, while waiting for a recovery in its volumes, it raises concerns over the existing DSP, Edwards commented.