What are we looking for?
Undervalued North American-listed midstream energy companies.
The screen
Since bottoming on March 23, the S&P 500 has recovered by more than 30 per cent as investor sentiment has been rising. The S&P 500 Energy Index has also shown signs of strength, increasing by more than 60 per cent since March 18. Midstream companies, which store and transport crude and related products, have historically been relatively insulated from volatility in commodity prices, however current market fundamentals have affected this sector, with many stocks down more than 50 per cent year to date, and some companies trading at levels not seen in more than a decade.
We search for North American midstream energy companies with low valuations relative to their peer group using these criteria:
- First, we screen for companies with a market capitalization greater than US$1-billion.
- We use the StarMine Relative Valuation model to screen for companies with a score of greater than or equal to 75. The Relative Valuation model is a percentile ranking of stocks based on price and enterprise value multiples such as price-to-earnings, price-to-cash-flow, price-to-book and enterprise value-to-EBITDA, with 100 representing the highest rank. (EBITDA stands for earnings before interest, taxes, depreciation and amortization.)
- Finally, we screen for companies with strong future growth rates. We use the StarMine Intrinsic Valuation model to screen for companies with a price-to-intrinsic-valuation score of greater than or equal to 75. The Intrinsic Valuation model is a percentile ranking of stocks based on a dividend discount model valuation, with 100 representing the highest rank. The dividend discount model is a valuation method based on the theory that a stock is worth the sum of all future dividend payments.
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What we found
The screen produced six midstream energy companies, all of which are U.S.-listed. Dividend yields range from 8.1 per cent to 18.3 per cent, which is significantly more than the S&P 500 Energy Index dividend yield of 5.75 per cent. The names are ranked by Intrinsic Valuation implied return, that is, the StarMine model’s estimate of future returns over the next 12 months.
Plains All American Pipeline LP, headquartered in Houston with assets in Canada, as well as the United States, has seen its stock value fall by more than 50 per cent this year, and is trading at prices not seen since the early 2000s. Plains did report net income of US$311-million in the first quarter, with their facilities and supply and logistics divisions outperforming analysts’ consensus. The transportation division, which accounted for 55 per cent of first-quarter EBITDA, is expected to face headwinds in 2020 owing to lower crude volumes. Despite these challenges, the company has a strong asset base and the StarMine Intrinsic Valuation model suggests a share price of US$23.96, a 190.7-per-cent increase from current prices.
Energy Transfer LP, headquartered in Dallas and operator of the Dakota Access Pipeline, posted a loss of US$964-million in the first quarter, largely driven by impairment charges of US$1.3-billion. (The company advised that the asset writedowns were owing to the effects of the COVID-19 pandemic.) The company did post adjusted EBITDA of US$2.6-billion, a decrease of 3.65 per cent compared with the first quarter of 2019, and announced it would reduce capital spending by US$400-million this year, while also cutting costs by up to US$250-million. With the stock down 36.2 per cent year to date, the StarMine Intrinsic Valuation model indicates Energy Transfer could see its share price rise to US$24.55.
Investors are advised to do their own research before trading in any of the securities shown.
Stephen Donovan, MBA, is a customer success manager supporting Refinitiv’s trading, investment and advisory solutions.
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Stephen Donovan, MBA