UBS: Sell Dynegy Before Guidance Release

UBS’ Julien Dumoulin-Smith believes Dynegy Inc. DYN is likely the most challenged among the independent power producer sector, given the company's high leverage and exposure to PJM and ISO-NE capacity markets.

Dumoulin-Smith downgraded the rating on the company from Neutral to Sell, while lowering the price target from $8 to $7.

Risk To Guidance

“We stress risk to 2017 guidance given the delay in the Engie approval (at least the month of Jan). We further emphasize that upside from the potential buyout by VISTRA ENERGY CORP COM USD0.01 VSTE could be challenged given a recent Spark Spread article reporting VSTE was now evaluating a bid for GenOn,” the analyst mentioned.

Capacity Auction

Dumoulin-Smith also expects a disappointing capacity auction to act as a negative catalyst in H1m stating that the PJM and ISO-NE capacity results are likely to be disappointing, hurting Dynegy the most among its IPP peers, since the company derives about 75 percent of its EBITDA from these two regions.

Revisions

“Specifically, we are formally revising down our view on 2020/21 to ~$100/MW-day. Further we see a negative skew to ISO-NE capacity prices from last year of $7.03/kW-mo in coming weeks down to as low as 5.50,” the analyst went on to say.

Given the potential for negative revisions following the upcoming auctions in H1, along with limited deleveraging, Dumoulin-Smith expects management to focus largely on leverage rather than new strategies to diversify Dynegy’s portfolio.