Stifel Cuts SolarCity Target, Downgrades Energy Transfer Partners: Here's Why

Shares of Energy Transfer Partners LP ETP have gained more than 9 percent in the last one month, while shares of SolarCity Corp SCTY have plunged 51 percent year-to-date.

Energy Transfer Partners

Stifel’s Selman Akyol downgraded the rating for the company from Buy to Hold, citing valuation.

The LP has a diversified asset base, which is largely fee-based. In view of this, the current multiples do not appear excessive. However, potential near-term challenges could limit further expansion. Moreover, the impending merger of Energy Transfer Equity LP ETE and Williams Companies Inc WMB creates “another layer of uncertainty,” analyst Selman Akyol said.

“Given reduced drilling/completion activity and the legacy Regency assets, we are concerned with volume and commodity price exposure associated with ETP's gathering and processing assets,” Akyol commented.

Energy Transfer Partners has previously lowered its growth capital spending target for 2016 from $4.9 billion to $4.2 billion. Moreover, the partnership had indicated that an alternative financing option for its Dakota Access Pipeline project could further reduce its capital needs.

“As such, we continue to assume the partnership will require $500 million of equity capital to complete its 2016 budget. Given our limited visibility, the required $500 million in capital is another reason to be cautious,” the Sifel report noted.

SolarCity

Stifel’s Sven Eenmaa maintained a Buy rating for the company, while reducing the price target from $65 to $56. Investor interest seems to be centered on financing.

“With several term sheets received and being negotiated, the company appears to be making progress on the monetization front with the aim to deliver better IRRs than SolarCity’s current stock valuation implies,” analyst Sven Eenmaa wrote.

He expressed confidence regarding the probability of successful transactions over the next six to nine months, adding that management’s continued focus on reaching the previously guided cash flow positive in 4Q16 was encouraging.

“Cash and liquidity available to SolarCity as of 4Q15, pro forma for recent financings and including tax equity, amounted to $1.9bn+ per our calculations, which to us implies no immediate funding need and sufficient time to negotiate,” the analyst commented.

Eenmaa pointed out, however, that while the stock’s risk/reward over a 12-month horizon appeared favorable, “we view the transaction timing here as not without risks, which could have implications on 2016 installation volumes.”