EUR 850.00 For Business Accounts Only

Morningstar | DCP Midstream's 3Q Provides More Confirmation of Significant NGL Growth Within Midstream Industry

DCP Midstream's third-quarter results were strong, as the entity continued to benefit from strong growth in natural gas liquids, or NGLs, volumes. Management boosted its 2018 expectations to above the high end of its prior guidance of adjusted 2018 EBITDA between $1.065 and $1.135 billion. As we had already assumed DCP would exceed the high end of the range, we are maintaining our $47 per unit fair value estimate and no-moat rating.

DCP primarily benefited from the strong ramp-up of the Sand Hills and Southern Hills pipelines, which experienced record volumes during the quarter. Sand Hills pipeline capacity now stands at 440,000 barrels per day, or b/d, from 425,000 at the end of the second quarter of 2018, and should reach 485,000 b/d by the end of 2018. Given our NGL forecast, we expect the pipeline to expand further to 585,000 b/d over the next few years. In addition, DCP's gathering and processing segment experienced a 10% uplift in volumes, helped by higher production in the Midcontinent, Eagle Ford, and DJ Basin.

DCP is holding off a final investment decision on investing in a new gathering and processing plant in the DJ Basin until the outcome of the vote on Proposition 112. The proposition would prohibit fracking operations within 2,500 feet of most buildings, parks, and bodies of water throughout the state. However, operators have been aggressive on securing permits for drilling activity for several years in the future limiting the immediate impact of any drilling slowdown. Further, we do not think the measure will pass, so our valuation is not impacted.

With a distribution ratio now well above 1 at 1.18 year to date, DCP can now retain cash to reduce its reliance on equity issuances in order to fund its capital spending plans. We think this is a good idea, particularly as DCP upped its 2018 growth capital spending plans to $825 million to $900 million from $650 million to $750 million last quarter.

For more on our NGL forecast, please see our July Energy Observer, "The Natural Gas Liquids Rubik's Cube Solved." For more on midstream moats, please see our reports, "Midstream Energy Offers Efficient Scale Moats at a Discount" and "Investing in the Efficient Scale Moat Source" published in March 2018 and October 2018, respectively.