Analyst Note| Stephen Ellis |
DCP Midstream completed a difficult 2020 with respectable results in the fourth quarter and issued somewhat conservative 2021 guidance at a midpoint of about $1.2 billion compared to our $1.3 billion forecast and 2020 EBITDA of $1.25 billion. As it stands, we think there's a bit more upside in the second half of the year in terms of gathering and processing volumes as rig activity picks up from current levels given more attractive oil prices whereas DCP is forecasting a year-over-year decline in volumes. DCP gathering and processing volumes are already higher sequentially. DCP's other assumptions regarding margin compression due to the industry overbuilding in the Permian, higher natural gas liquids pipeline volumes, increased Cheyenne Connector contributions, and weaker Guadalupe earnings due to narrower spreads are realistic, in our view. We will maintain our $12 fair value estimate and no-moat rating. Current growth capital expenditures are set a midpoint of $50 million, below expected maintenance spending of $65 million. We believe spending less than maintenance spending will be unsustainable, and expect increased growth spending later in 2021. Still, even allowing for DCP's somewhat conservative assumptions, we still easily expect over $400 million in excess cash flows after distributions and capital spending. We expect the cash flows to be primarily focused towards reducing leverage, as DCP's adjusted leverage is at 3.9 times, well above our preferred 3.5 times (or lower) target. We think the partnership is on the right track by reducing debt by $125 million in the fourth quarter. DCP has a $500 million maturity due in September 2021, which can be covered under the $1.39 billion available on its credit facility. We'd prefer that the partnership move to refinance this maturity ahead of time instead of using its credit facility on a temporary basis like it did in 2020 so it can demonstrate to the market that it can easily access capital as needed.