EUR 850.00 For Business Accounts Only

Morningstar | DCP Benefits from Strong NGL Volumes at Sand Hills and Southern Hills in First Quarter

DCP reported a good first quarter, and we don't expect a material change to our $35 fair value estimate or no-moat rating. The partnership benefited from strong natural gas liquids volumes, which increased 30% from last year's levels as both the Sand Hills and Southern Hills pipelines ramped up. The Sand Hills pipeline capacity now stands at 500,000 bpd, as it moves barrels to Mont Belvieu, Texas, from the Permian Basin. We expect further optimization efforts to eventually take Sand Hills capacity to 550,000 bpd. DCP also benefited from a 10% increase in gathering and processing volumes, primarily due to higher DJ Basin volumes, but also contributions from the Permian, Eagle Ford, and midcontinent. Given the higher volumes, EBITDA increased 22% to $326 million, though about half of the increase was due to non-cash derivative mark-to-market gains. However, with the improvement in earnings, the distribution coverage ratio now stands at a high 1.45 times, potentially providing DCP with enough flexibility to pursue an elimination of its incentive distribution rights while limiting the prospect of a distribution cut.

Leverage, as we estimate it, is about 4.4 times, and we expect it to remain relatively high in the next few years to finance DCP's spending efforts. These projects include its contribution (it owns a 25% interest) toward the 2 bcf/d Gulf Coast Express (GCX) pipeline and pipeline and gathering and processing investments in the DJ Basin. The GCX is a good way to leverage DCP's gathering and processing assets that can supply volumes. In addition, DCP retains the option to purchase 30% of two 150 mbpd fractionators at the Sweeny hub from Phillips 66 (one of its parents) for $400 million when they are due to start up in late 2020. We view these fractionators as a smart investment given the tightness in the fractionation market, fee-based structure, and linkage to the Phillips 66 LPG export facility.