DCP Midstream

Stock Looks Undervalued: DCP Midstream (NYSE: DCP) has a diversified portfolio of midstream energy assets encompassing gathering, processing, transporting and marketing. The company is also one of the leading natural gas liquids producers, processors, and marketers of in the United States. 

Recent updates:

• On April 21, DCP Midstream declared the first quarter distribution of US$ 0.39 per unit or or US$ 1.56 per unit on an annualized basis. The common unit distribution will be paid on May 15.

• On April 13, the company announced a 15% reduction in its workforce in response to COVID-19 outbreak. DCP Midstream’s senior executive team’s base salary and variable compensation will also be reduced by 10% to 15%. The workforce reduction, voluntary cut in the base salary, and other cost-saving measures are likely to add US$ 40 million to the retained cash flows.

• DCP is set to announce its first quarter results after the markets close on May 6.

Financial Highlights: DCP Midstream reported operating revenues of US$ 7.63 billion, down 22% y-o-y. The sharp decline in DCP Midstream’s operating revenues reflects double-digit decline in both of its segments. Lower commodity prices decrease in volumes took a toll on the company’s revenues. Total gross margin fell 11% on account of lower commodity prices and lower volumes in the Midcontinent region coupled with lower margins in certain regions. Interest expenses increased 13% y-o-y, reflecting higher average outstanding debt balances. Further, higher average debt cost remained a drag. Lower operating revenues decline in margins, and increased interest costs took a toll on the company’s bottom line. The company’s net income slumped about 93% to US$ 21 million. 

At the end of 2019, the company has total debt of US$ 5.9 billion. Meanwhile, net cash from operating activities stood at US$ 859 million. 

Financial Highlights (Company Reports)

Valuation Methodology (Illustrative): EV/EBITDA -based approach 

Note: All forecasted figures and peers have been taken from Thomson Reuters, NTM-Next Twelve Months

Stock Recommendation: DCP Midstream stock has declined more than 72% so far this year. The oil & gas industry is facing significant downward pressure with unparallel decline in demand and increased supply. The sharp decline in DCP stock followed lower commodity prices and volumes which is taking a toll on the company’s operating revenues and profitability. DCP announced series of measures to spur liquidity through distribution cut, reduction in workforce and growth capital, and other cost-saving initiatives. Also, the company has low counterparty risk, and multi-year hedge programs to support cash flows. However, weak external environment poses challenge. Also, DCP Midstream carries a significant amount of debt on its balance sheet. We have valued the stock using EV/EBITDA Multiple and considered companies such as Targa Resiurces Corp (NYSE: TRGP), ONEOK Inc (NYSE: OKE), and NuStar Energy (NYSE: N) etc for comparison purpose. DCP stock trades at a lower valuation multiple when compared to the peer group average. We expect the multiple to expand with recovery in oil prices. We have arrived at a target price that implies low double-digit upside (in % terms). Hence, we recommend a ‘Speculative Buy’ on the stock at the closing market price of US$ 6.72 as on April 22, 2020.

DCP Daily Price Chart (Source: Thomson Reuters)

Delek Logistics Partners

Delek Logistics Partners (NYSE: DKL) provides logistics and marketing services for crude oil including gathering, storage, transportation and marketing. The company operates through two operating segments including Pipelines and Transportation, and Wholesale Marketing and Terminalling.

Recent updates:

• On April 21, Delek Logistics Partners announced a quarterly cash distribution of US$ 0.89 per unit (or US$ 3.56 per unit annually) for the first quarter of 2020. The distribution reflects an increase of 0.6% over the fourth quarter 2019. The first quarter cash distribution will be payable on May 12.

• On March 31, the company announced an asset dropdown agreement with Delek US Holdings under which Delek Logistics Partners will acquire the Big Spring gathering system from Delek US Holdings for 5 million in units and a cash consideration of US$ 100 million.

• The company will announce its first quarter fiscal 2020 result after the markets close on May 5.

Financial Performance: Delek Logistics Partners announced its fourth quarter results on February 25. For the fourth quarter, Delek Logistics reported revenues of US$ 138.6 million, down about 13% y-o-y from US$ 159.3 million. The y-o-y decline in revenues reflects lower prices and decrease in volumes in the west Texas wholesale business. However, improved performance in the gathering assets and Paline Pipeline supported sales. Total operating expenses came in at US$ 22.3 million in the fourth quarter, up from US$ 15.4 million in the prior-year period. The sharp increase in operating expenses reflects spill related costs coupled with increase in the maintenance and repair and outside services. Total contribution margin stood at US$ 42.5 million, down from US$ 45.0 million in Q4FY18. The company posted EBITDA of US$ 43.3 million, up from US$ 40.8 million in Q4FY18, reflecting higher contribution from Paline Pipeline and Gathering Assets and increased income from equity investments. Delek Logistics posted net earnings of US$ 21.6 million in the fourth quarter as compared to US$ 21.3 million in Q4FY18. Net cash from operating activities stood at US$ 45.8 million, down from US$ 95.4 million in the prior year period. Meanwhile, distributable cash flow came in at US$ 33.0 million, up from US$ 27.6 million in Q4FY18.

At the end of the quarter, the company had total debt of about US$ 833.1 million and cash of US$ 5.5 million. The total leverage ratio was about 4.43x.

Financial highlights (Source: Company Reports)

Stock Recommendation: Delek Logistics stock has declined more than 56% so far this year as low oil prices and decline in volumes remained a drag. The company’s growing logistics assets, multi-year contracts, and increase in distributable cash flows are some positives. Moreover, the company surprised with its 0.6% increase in distribution. We believe demand erosion following COVID-19 outbreak and supply glut to weigh on the stock in the near-term. Also, the high degree of uncertainty surrounding the economy and uncertainty prevails over oil prices. DKL has significant portion of debt and has jumped significantly in the last five trading days, indicating that positives are price in. We recommend a “Watch” on Delek Logistics at the closing market price of US$ 13.98 on 22 April 2020.

DKL Daily Price Chart (Source: Thomson Reuters)

Antero Midstream Corporation

Risk Reward Fairly Balanced: Antero Midstream Corporation (NYSE:AM) operates in natural gas and NGL production in the Appalachian Basin. The company is focused on creating value through developing midstream infrastructure in two of the premier North American Shale plays, the Marcellus and Utica Shales.

The company announced a dividend of US$0.3075per share, payable on May 12, 2020, remain unchanged on a quarter on quarter basis. During the first quarter of FY20, the company confirmed repurchase of 4.7 million shares at a total consideration of US$15.8 million. The company will announce its first quarter FY20 results on April 29, 2020.

Q4FY19 Operational Highlights: AM declared its quarterly results, wherein the company reported its total revenue US$ 239.06 million, which constitutes US$ 165.36 million from Gathering and compression segment and US$ 91.539 million from Water handling. Notably, 2019 marked the first year wherein the company started to report revenues. The group reported an operating loss of US$192.60 million. General and administrative expense stood higher at US$ 33.09 million, as compared to US$ 11.98 million. Net loss stood at US$ 144.56 million, as compared to a profit of US$ 21.38 million in Q4FY18. Capital expenditures were during the quarter stood at US$ 126 million. During the quarter, the company reported connected 29 wells to its gathering system within the Gathering and Processing segment while compression capacity utilization stood at ~85% during the quarter. Within the Water Handling segment, the company reported serviced of 32 well completions, reflecting a growth of 7%.

FY19 Income Statement Highlights (Source: Company Reports)

Stock Recommendation: The stock of AM is quoting at US$ 4.71 with a market capitalization of US$ 2.28 billion. The stock price corrected ~65% in the last one year. However, it made sharp recovery in the last one month and generated a whopping ~104% return. The company has sufficient liquidity of US$1.2 billion, which will support the business’s working capital in the short run. However, AM stock is trading at a forward P/CF multiple of 3.3x against the industry average of 2.9x and we believe the positives are already priced in the stock. The downward pressure on oil & gas industry and uncertainty surrounding the economy keeps us at bay. We recommend a ‘Watch’ on AM stock at the Closing market price of US$ 4.71 as on April 22, 2020.

AM Daily Price Chart (Source: Thomson Reuters)

USD Partners LP

Drastic Price Correction, High Dividend Yield: USD Partners LP (NYSE: USDP) is a fee-based organization which acquires, develops and operate midstream infrastructure and complementary logistics solutions for crude oil, biofuels and other energy-related products. USD Partners recently announced that the company’s terminals would remain fully functional while its facilities will be closed due to COVID-19 outbreak.

The company distributed a quarterly dividend of US$ 0.37 per share, depicting an increment of 2.8% on y-o-y basis. Meanwhile, the company distributed a total dividend distribution of US$ 10.56 million, higher than US$ 10.06 million in Q4FY18.

Q4FY19 Financial Highlights: For the period ended December 31, 2020, USDP posted its total revenue of US$ 29.58 million, as compared to US$ 30.33 million in pcp. The decline was due to lower revenue from Terminalling services-related party segment. The company reported lower operating income of US$ 4.32 million, as compared to US$ 6.36 million in Q4FY18. The company witnessed a major improvement in its net income at US$ 2,140 million, stood higher from US$ 1,892 million. The company exited the quarter with a cash balance of US$ 3.08 million, and a total asset worth US$ 289.56 million. Capital investments stood lower at US$ 1.368 million, as compared to US$ 8.37 million in Q4FY18.

Quarterly Data (Source: Company Reports)

Stock Recommendation: The stock has plunged ~77% in a year. The majority of the company’s revenue is derived on a yearly basis with minimum monthly commitment fees. For FY19, the company reported a lower ROE of 11.80%, as compared to 27.4% in FY18. USDP will continue to operate only through its terminals. While the stock price is co-related with the international crude oil prices as the majority of the company’s clients are oil exploration companies. Low demand and increased supply have resulted in a sharp correction in the crude oil prices. Given the uncertainty surrounding the economy, it’s hard to predict when the oil prices will recover. We expect the situation to remain challenging in near-term. We are sceptical on the future order book of the company, and the same continues for its profitability and upcoming dividend policy. Thus, we choose to remain on the side-lines. Despite a sharp fall in its stock prices, USDP doesn’t look like a value buy. USDP stock is quoting at a higher EV/EBITDA valuation of 6.9x, as compared to industry (Oil & Gas Equipment Services) of 5.6x. Hence, we recommend ‘Watch’ stance on the stock at the closing market price of US$2.50 per share as on April 22, 2020.

USDP Daily Price Chart (Source: Thomson Reuters)

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