EUR 850.00 For Business Accounts Only

Morningstar | DCP Midstream Reports Solid Quarter; We Remain Concerned About Outlook

DCP Midstream reported a solid fourth quarter, yet we remain concerned about the outlook with the prospect of weak processing margins throughout 2019. Frac spreads were below $3 per btu in December 2018 and have rebounded to close to $4 more recently. Any time spreads are below $3, this implies very poor economics for gathering and processors, in our view. More of this type of volatility is not great for DCP, given its exposure to commodity prices via its percentage of proceeds contracts. We plan to update our forecast, but we don't plan on a material change to our $35 fair value estimate or no-moat rating. Fourth-quarter results benefited from higher volumes on the Sand Hills and Southern Hills pipelines, which was more than offset by the gathering and processing segment's higher reliability and maintenance spending, lower distributions from Discovery, and weaker Permian results. Overall adjusted EBITDA fell to $245 million from $280 million. In turn, distributable cash flow declined, and the coverage ratio fell below 1 times to 0.9 times.

Management forecast that 2019 adjusted EBITDA is expected to be between $1.15 billion and $1.29 billion, up from $1.09 billion in 2018. Growth capital expenditures are expected to be between $600 million and $800 million. While DCP is not expected to issue common equity, preferred equity, debt issuances, and asset sales are likely to ensure funding for projects in 2020. The partnership announced the sale of its wholesale propane business in January 2019, which will help a modest amount. With leverage already at 3.8 times, DCP has limited scope to increase its leverage significantly more. In short, DCP has to execute extremely well in 2019 with the prospect of a weaker market yet still find enough capital to fund an aggressive capital spending program and keep its distribution coverage above 1 times.