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Morningstar | Reducing DCP's Fair Value Estimate Due to Dimmer 2019 Outlook

We are reducing our fair value estimate for DCP Midstream to $35 from $47 per unit, while maintaining our no-moat rating. Weaker commodity prices have crushed frac spreads, meaning it is much less economic to extract natural gas liquids. DCP is one of the largest G&P players we cover with the majority of its operations exposed to G&P assets, meaning higher commodity price and drilling activity sensitivity. We now model volume declines, reduced product margins, and lower related fees. We believe DCP has material exposure to percentage of proceeds contracts, which tend to be especially commodity price sensitive, which will mean more in 2019 when DCP's unhedged exposure increases to about 30% of its overall fee structure. Given DCP's fixed cost structure, our 2019 EBITDA forecast declines to about $800 million from our prior expectation of $1.3 billion.

With DCP's relatively high leverage (over 4 times), we believe it will have to issue about $2 billion in equity to maintain its distribution and planned capital spending over the next few years. With the coverage ratio very slim currently at just above 1 times, we anticipate it will decline well below 1 times in 2019, raising the prospect of a distribution cut if capital cannot be obtained elsewhere at reasonable prices.