In a presentation made at Mizuho Energy Summit on March 29th DCP outlined some of the actions it is going to take to meet ongoing challenges. Subtracting that $127.5 million from the $780 million worth of distributable cash flow 'DCF' DCP guided to for 2020, I get a new reduced 2020 DCF estimate of approximately $650 million dollars. This is a $127.5 million reduction in 2020 Adjusted EBITDA guidance. Given this information, and for want of anything better, I'm going to assume 10% of the $1,275 million in 2020 Adjusted EBITDA management guided to disappears due to the COVID-19 and commodity price challenges outlined above. This means we can guesstimate approximately 6% of DCPs current business is both not fee-based or hedged, and placed with non-investment grade counterparties. Roughly 80% of DCP's business is either fee-based or fully hedged, with 70% of its counterparties being investment grade. However in order to diversify holdings and mitigate risk it also shares interest with other firms in a number of assets including the: Sand Hills Pipeline, Southern Hills Pipeline, Front Range Pipeline, Gulf Coast Express Pipeline, Texas Express Pipeline, Mont Belvieu Enterprise Fractionator, Mont Belvieu 1 Fractionator, and Discovery Producer Services LLC. This gives them ample interest in the ongoing success of DCP.ĭCP fully owns many of its producing assets. After a simplification transaction that occurred in November 2019 the parent no longer holds any incentive distribution rights 'IDRs' however, in combination Phillips 66 and Enbridge now own 56.5% of the common units. Its parent DCP Midstream LLC is 50% owned by Phillips 66 ( PSX) and 50% owned by Enbridge ( ENB). Source: DCP Midstream Business Model: Natural Gas and NGL FocusedĭCP Midstream ( DCP) is a K-1 producing natural gas and natural gas liquids 'NGL' focused, North American midstream energy limited partnership. In fact we find this particular grouping of equities ripe hunting grounds because again many of these firms will not be as negatively affected by COVID-19 and oil price war concerns as the market seems to assume. Many are trading remarkably cheap right now with EV/Forward EBITDA's below 8x. In the chart below we focus on natural gas centric firms. Excess production combined with declining demand flood the world with oil. And finally those energy firms with a lot of oil storage are actually seeing a significant benefit in the current environment as contango creates a profitable storage trade. Additionally, midstream companies that have fee-based contracts with investment grade counterparties will be less affected than those that don't. Thus, the underlying cash flows of most natural gas focused production, processing, and transport firms should not be as affected as those of firms more focused on oil. Source: US Energy Information Administration During the oil price crash of 2015, natural gas volume consumed even went up. As you can see below, during the Great Recession natural gas consumption followed its normal seasonal pattern in the US with barely a hiccup. do not decline in a recession nor as people are shut-in due to COVID-19. This is because most of its main uses throughout the world- electricity production, heating of buildings, cooking, fertilizer production, etc. Natural gas demand is unlikely to decline much. However these challenges will not hit all energy companies equally. These low prices are a result of less demand due to COVID-19 shut-downs in combination with Russia-Saudi Arabia sponsored oversupply. Once hedges run out, upstream oil focused companies will also be devastated by low commodity prices. Macro:Įntertainment and Travel related companies are seeing their operations shut down due to COVID-19. Furthermore, we think these moves make DCP preferred an attractive pick for income investors. It is true that DCP's high debt level and capex spending could have become problematic however, we think their recent 50% cut in the common dividend and 75% cut in capex both prudent and sufficient. In DCPs case commodity price declines and the coronavirus crisis will impact its operations, but not to the degree implied by its price drop. There are other situations however where firms aren't as tied to commodity pricing and have stable risk profiles, yet their share prices also dropped with little regard for the firm's underlying finances or cash flows.ĭCP Midstream ( NYSE: DCP) has seen its share price get devastated. In many cases, the share price drops are justified, afterall crude prices are down about 65% year to date 'YTD', natural gas is down about 23% YTD, and NGL prices are down about 55% YTD. High-yield stocks are being sold across the board, especially anything related to the energy sector.
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