Gathering and processing volumes in the Permian basin are likely to decline, prompting a Barclays analyst to revisit their view on midstream energy companies operating in the region.
Analyst Christine Cho downgraded shares of Targa Resources Corp (NYSE: TRGP) from Overweight to Equal-weight and lowered the price target from $57 to $52.
Cho also downgraded DCP Midstream LP (NYSE: DCP) from Equal-weight to Underweight and reduced the price target from $46 to $39.
The analyst upgraded shares of Enable Midstream Partners LP (NYSE: ENBL) from Underweight to Equal-weight and increased the price target from $14 to $17.
The anticipated reduction in G&P volumes in the Permian basin is due to natural gas takeaway constraints and limitations on flaring, which is likely to lead to slowdown in completions and impact inlet volumes, Cho said in a Tuesday note.
The price performance of G&P stocks suggests that these factors are not being priced in, the analyst said.
Cho said she expects the volume reduction to result in either higher crude prices due to softer-than-expected U.S. production or other basins making up the shortfall from the pullback in Permian volumes.
"Both scenarios would be positive for G&P networks in other basins, and we like the Eagle Ford and Bakken in particular, as these regions can bypass Cushing to get to the Gulf Coast, while STACK and the DJ Basin growth may be somewhat subject to Brent/WTI spreads."
Downside Risk To Street Estimates For Targa
Cho sees downside risk to the Street's 2018 adjusted EBITDA estimates for Targa and said she expects estimates to come down a bit over the next several months. Though the analyst is optimistic on second-quarter estimates thanks to robust volumes in G&P as well as logistics, Cho said she's concerned about Permian volumes over the next 12-18 months based on comments from producers.
Barclays remains long-term constructive on the Permian production potential, which Cho said will help the company hit 2021 targets with the help of ongoing large-scale infrastructure investments and incremental gas processing capacity across its footprint.
DCP Midstream's Challenges Overlooked By Market
DCP Midsream's shares are up about 11.75 percent year-to-date on optimism surrounding its logistics footprint and DJ Basin exposure, Cho said. Despite having no distribution growth and coverage of roughly one time, the shares trade at a slight premium to the G&P group average, the analyst said.
Cho sees the company growing in the long term due to its considerable pipeline investment.
" ... We believe the challenges in the near-to-medium-term are being overlooked by the market and would be price takers at current levels," the analyst said.
Enable Midstream Benefits From Shifting U.S. Production Outlook
Enable raised its fiscal 2018 guidance in its first-quarter report release following strong quarterly performance in its Anadarko Petroleum Corporation (NYSE: APC) assets and an improving outlook on its Haynesville system, according to Barclays.
Andarko's positive results and a revised expectation for above-MVC levels in Haynesville in 2018 reflect the producer's intention to deploy capital in basins that are less hampered by infrastructure constraints than the Permian, Cho said.
Enable "is poised to benefit over the coming quarters from a shifting U.S. production outlook," the analyst said.
The Price Action
Targa shares were sliding 1.32 percent to $49.99 at the time of publication Tuesday. DCP Midstream shares were up 0.22 percent to $41, while Enable Midstream shares were rising 1.76 percent to $17.34.
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Latest Ratings for TRGP
|May 2018||Stifel Nicolaus||Maintains||Buy||Buy|
|Apr 2018||Deutsche Bank||Initiates Coverage On||Hold|
View More Analyst Ratings for TRGP
View the Latest Analyst Ratings
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