CorEnergy M&A Strategy, Dividend Coverage Concerns Lead To Downgrade

Bank of America Merrill Lynch downgraded shares of Corenergy Infrastructure Trust Inc CORR, citing the uncertain growth outlook, year-to-date performance relative to the midstream MLP sector and a still somewhat elevated business risk profile.

Unsustainable Uptrend?

Analysts led by Gabe Moreen noted that CorEnergy has outperformed the AMZ index by 12 percent. The analysts feel the degree of outperformance is unwarranted, given the growth outlook.

M&A Outlook, Funding A Worry

Merrill Lynch clarified that the growth at CorEnergy is driven primarily by M&A, with the management having guided to one or two transactions per project range in 2017/18. The firm believes potential M&A might renew the company's growth story but feels the investors will focus on risk-adjusted returns, given the company's M&A track record.

"Recent transactions in the midstream sector suggest valuations for high quality midstream assets in many production basins remain elevated overall despite a recent commodity pullback," the firm said.

The firm also broached the possibility of additional funding needs, as the company's balance sheet can support deals of the size $100 million to $130 million. The company sees potential external capital needs to prove a headwind for M&A accretion.

Tight Dividend Coverage

The firm also thinks the dividend coverage of 1.1 times, assuming flat dividends, is tight, relative to the company's risk profile. If MoGas' proposed growth project fails to gain traction from customers, the firm feels the tightness will persist for current dividends.

As such, Merrill Lynch downgraded shares of the company from Neutral to Underperform, with a $35 price objective.

At the time of writing, shares of the company were plunging 5.63 percent to $33.

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