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MLP and Midstream - Credit Suisse

MLP and Midstream - Credit Suisse
https://www.streetinsider.com/Analyst+C ... 58909.html



Initiating Coverage
We are launching coverage of 35 midstream names and we view our sector as a place to selectively own stocks. Please refer to our full initiation slide deck presentation.
 We think the sector will benefit from tailwinds as increased rig counts + higher production => a 1H18 inflection in midstream sector volumes driving both higher asset utilizations + cash flows and that continued US production growth sets the stage for further infrastructure build-out => a long-term midstream growth story.
 That said, we believe the volume recovery won’t be uniform and basins will have differing dynamics (most positive: Permian, Marcellus/Utica, SCOOP/STACK). Lastly, and most importantly we think anemic capital markets and higher financing costs will create an overarching sector headwind => exacerbating the risk of eroding project returns given both high sector-wide competition as well as a deluge of private equity capital waiting to be deployed.
 Many companies are adapting to market conditions by changing business models. The sequencing of steps involves: IDR resets, simplifications, and moves toward self-funding vs. capital market dependent models. Generally the market has responded positively. We expect this trend to continue in 2018 – increasing differentiation across structures (C-corp, non-IDR MLP, traditional MLP), funding strategies (self-funding vs. high equity needs), growth profiles (organic vs. drop-downs), and basin expectations. Our general preference is: high coverage, lower leverage, and nominal equity needs. Lastly, we wonder if companies will increasingly convert to traditional C-corp structures as a way to widen their investor bases.
 Our Top Picks: Williams (WMB, WPZ), Enterprise Products (EPD), Noble Midstream (NBLX), MPLX LP (MPLX), and Plains All American (PAGP, PAA).
 Our Underperforms: Holly Energy Partners (HEP), Buckeye Partners (BPL), Magellan Midstream (MMP), Tallgrass Energy GP (TEGP).
Valuation: Our main valuation methodology is EV/EBITDA. We think the metric is helpful in comparing not only across structures in our space (Ccorp, non-IDR MLP, normal IDR) but also across different energy subsectors (as we have a sense for where E&P, refiners, OFS, utilities trade) and the wider market.
Risks: Key risks to our sector call include commodities, regulatory risk, capital markets access, and increasing competitive pressure.