Analyst Note| Stephen Ellis |
DCP's first-quarter results included a $60 million negative EBITDA impact due to lost volumes and record gas pricing due to winter storm Uri, which affected contract settlements. While we see the impact as one-time and not material enough to change our fair value estimate, DCP is the first U.S. midstream firm we cover to report a net negative impact due to Uri, despite benefiting to some extent from its gas storage exposure. The volume declines across DCP's portfolio is greater than we've seen at peers, with gathering and processing volumes down 17%, and natural gas liquids pipeline throughput down 15% from last year's levels. The scale of the underperformance suggests that DCP may need to consider greater investments in gas or natural gas liquids storage to improve its reliability as a supplier. Despite the Uri impact, DCP maintained its overall 2021 EBITDA guidance of a midpoint of $1.14 billion. We will hold our fair value estimate and no moat rating intact while we incorporate these results into our model.
We continue to think DCP is struggling to allocate capital effectively, meriting a Poor capital allocation rating. By our estimate, DCP generated substantial negative excess cash flow after capital spending and distributions of over $100 million. This meant that DCP was not able to reduce debt during the quarter (it increased) or buy back units while peers have been able to do both. Further, we remain concerned that capital spending levels is well below sustainable levels at a midpoint of $50 million, while the distribution payout at $1.56 annually (or about $385 million including preferreds) is too high. While we would expect improvements over the next few quarters, due to Uri timing and working capital changes, the overall performance suggests poor operational execution for DCP this quarter.