Looking A Gift Horse In The Mouth? Credit Suisse Upgrades Midcoast Energy Partners

Midcoast Energy Partners LP MEP reported better-than-expected 1Q16 EBITDA of $23.6 million. Credit Suisse’s John Edwards upgraded the rating for Midcoast Energy Partners from Underperform to Neutral, while raising the price target from $5 to $6.

Operational Beat Driven By Cost Savings

Midcoast Energy Partners recorded DCF of $16.2 million, ahead of expectations. The company’s operational beat was driven by continued cost saving efforts, analyst John Edwards noted. Although the company’s adjusted gross margins of $70.1 million missed the estimate, its total gathering, processing and transportation volumes for the quarter were in-line.

Midcoast Energy Partners was floated by Enbridge Energy Partners, L.P. EEP for owning and growing the natural gas and NGL midstream business in the US. Edwards believes that Enbridge Energy’s generous distribution support to Midcoast Energy Partners may not be a practical solution in the longer run.

Enbridge Energy Partners, which is considering strategic alternatives, should buy Midcoast Energy Partners units. The analyst added, however, that the former’s balance sheet concerns may pose a challenge.

“Selling MEP along with their own share of the natural gas business could effectively kill two birds with one stone by de-risking gross margin and using proceeds to pay down debt,” the Credit Suisse report added.