Rating Update: Stock Rating D-Negative (9/10/19)-DCP Midstream LP (DCP).

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BUSINESS

DCP Midstream, LP, together with its subsidiaries, owns, operates, acquires, and develops a portfolio of midstream energy assets in the United States. The company operates in two segments, Gathering and Processing, and Logistics and Marketing. The Gathering and Processing segment is involved in gathering, compressing, treating, and processing natural gas; producing and fractionating natural gas liquids (NGLs); and recovering condensate. The Logistics and Marketing segment engages in transporting, trading, marketing, and storing natural gas and NGLs; fractionating NGLs; and wholesale propane logistics. As of February 13, 2018, it owned and operated approximately 60 plants and 63,000 miles of natural gas and NGLs pipelines with operations in 17 states. The company serves petrochemical and refining companies, and retail propane distributors.
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INVESTMENT RATING

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DCP’s future returns on capital are forecasted to fall short of the cost of capital. Accordingly, the company is expected to continue to be a Value Eraser.

DCP Midstream has a current Value Trend Rating of D (Negative).
The Value Trend Rating reflects contradictory signals from PTR’s two proprietary measures of a stock’s attractiveness. DCP Midstream has a slightly positive Appreciation Score of 66 but a poor Power Rating of 18, with the Negative Value Trend Rating the result.

DCP Midstream’s stock is selling well below targeted value. The current stock price of $25.56 compares to targeted value 12 months forward of $40.
This moderately high appreciation potential results in an appreciation score of 66 (only 34% of the universe has greater appreciation potential.)
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DCP Midstream has a Power Rating of 18. (DCP’s poor Power Rating indicates that it only has a better chance of achieving favorable investment performance over the near to intermediate term than 18% of companies in the universe.)
Factors contributing to this poor Power Rating include: is currently in an unfavorable positi; recent price action has been unfavorable; and earnings estimate behavior for DCP has been slightly negative recently.

INVESTMENT PROFILE

DCP’s financial strength is above average. Financial strength rating is 62.
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Relative to the S&P 500 Composite, DCP Midstream LP has significant Value characteristics; its appeal is likely to be to investors heavily oriented toward Income; the perception is that DCP is higher risk. All factors are relative weaknesses. Relative weaknesses for DCP include: low forecasted profitability, low historical profitability, low financial strength, high stock price volatility, low expected growth, low historical growth, and high earnings variability. DCP’s valuation is low: high dividend yield, low P/E ratio, and low price/book ratio. DCP has unusually low market capitalization.

CURRENT SIGNALS

DCP Midstream’s current operations are strong. Return on equity is rising, reflecting: and improving asset utilization.

DCP Midstream’s current technical position is very weak. The stock price is in a 4.7 month down move. The stock has declined 22.2% from its prior high. The stock price is below its 200 day moving average which is in a downtrend.

ALERTS

Marginal positive changes in DCP Midstream LP (NYSE: DCP) fundamentals have recently occurred: significant quarterly earnings acceleration occurred.
The stock is currently rated D.
DCP Midstream LP (NYSE: DCP) stock closed at $0.51 on 9/10/19 after a major increase of 12.9%. Moreover, this advance was accompanied by above average trading volume at 143% of normal. Relative to the market the stock has been weak over the last nine months but has risen 4.9% during the last week.

CASH FLOW

In 2018, DCP Midstream experienced a very significant reduction in cash of -$196.0 million (-85%). Sources of cash were much lower than uses. Cash generated from 2018 EBITDA totalled +$815.0 million. Non-operating sources contributed +$169.0 million (+21% of EBITDA). In 2018, there were no cash taxes paid. Re-investment in the business amounted to -$1,054.0 million (-129% of EBITDA). On a net basis, debt investors provided +$312.0 million (+38% of EBITDA) while equity investors removed -$438.0 million (-54% of EBITDA).
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DCP Midstream’s Non-operating Income, %EBITDA has enjoyed a very strong overall uptrend over the period. This improvement was accompanied by stability for the Dcp Midstream Lp Peer Group. (Since 2016 Non-operating Income, %EBITDA has experienced a very sharp decline.) In most years, DCP Midstream was in the top quartile. Currently, DCP Midstream is upper quartile at +21% of EBITDA (+$169.0 million).

DCP Midstream’s Cash Taxes, %EBITDA has exhibited little to no overall change over the period. This stability was accompanied by stability for the Dcp Midstream Lp Peer Group as well. In most years, DCP Midstream was in the top quartile. Currently, DCP Midstream is at the upper quartile at 0% of EBITDA ( $0.0 million).

DCP Midstream’s Business Re-investment, %EBITDA has suffered a volatile overall downtrend over the period. This downtrend was accompanied by a similar trend for the Dcp Midstream Lp Peer Group. In most years, DCP Midstream was in the lower quartile and top quartile. Currently, DCP Midstream is lower quartile at -129% of EBITDA (-$1,054.0 million).

DCP Midstream’s Debt Investors, %EBITDA has experienced a volatile overall uptrend over the period. This improvement was accompanied by a similar trend for the Dcp Midstream Lp Peer Group. In most years, DCP Midstream was in the second quartile and top quartile. Currently, DCP Midstream is above median at +38% of EBITDA (+$312.0 million).

DCP Midstream’s Equity Investors, %EBITDA has enjoyed a volatile overall uptrend over the period. This improvement was accompanied by an opposite trend for the Dcp Midstream Lp Peer Group. In most years, DCP Midstream was in the top quartile and lower quartile. Currently, DCP Midstream is lower quartile at -54% of EBITDA (-$438.0 million).

DCP Midstream’s Change in Cash, %EBITDA has exhibited a volatile overall uptrend over the period. This improvement was accompanied by stability for the Dcp Midstream Lp Peer Group. In most years, DCP Midstream was in the second quartile and lower quartile. Currently, DCP Midstream is lower quartile at -24% of EBITDA (-$196.0 million).
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DCP Midstream’s Cash, %Revenue has exhibited little to no overall change over the period. This stability was accompanied by stability for the Dcp Midstream Lp Peer Group as well. In most years, DCP Midstream was in the lower quartile. Currently, DCP Midstream is lower quartile at +0%.

PROFITABILITY

DCP Midstream LP’s return on equity has eroded very significantly since 2010 although it experienced a very sharp recovery after the 2017 low.
DCP Midstream LP’s very strong negative trend in pretax operating return significantly offset by a very strong positive trend in non-operating factors is a major performance consideration.
The productivity of DCP Midstream LP’s assets declined over the full period 2009-2019: asset turnover has suffered an downtrend although it experienced a very sharp recovery after the 2016 low.
Reinforcing this trend, pretax margin experienced a very strong overall downtrend although it experienced a very sharp recovery after the 2017 low.
Non-operating factors (income taxes and financial leverage) had a very significant positive influence on return on equity.
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DCP Midstream LP’s return on equity is above median (5.8%) for the four quarters ended June, 2019.
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Operating performance (pretax return on assets) is above median (2.7%) reflecting asset turnover that is at the upper quartile (0.66X) and slightly above median pretax margin (4.0%).
Tax “keep” rate (income tax management) is at median (98.4%) resulting in after tax return on assets that is substantially above median.
Financial leverage (leverage) is lower quartile (2.20X).

GROWTH RATES

There are no significant differences between DCP Midstream LP’s longer term growth and growth in recent years.
DCP Midstream LP’s historical income statement growth and balance sheet growth have diverged. Revenue growth has paralleled asset growth; earnings growth has fallen short of equity growth.

Annual revenue growth has been 6.1% per year. (More recently it has been 63.5%.)

Total asset growth has been 9.4% per year. (More recently it has been 26.6%.)

Annual E.P.S. growth has been -5.4% per year.

Equity growth has been 16.1% per year.

DCP Midstream LP’s consensus growth rate forecast (average of Wall Street analysts) is 2.0% — below the average of the historical growth measures.
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Relative to the Dcp Midstream Lp Peer Group, DCP Midstream’s historical growth measures are generally second quartile. Equity growth (16.1%) has been upper quartile. Total asset growth (9.4%) has been above median. Revenue growth (6.1%) has been above median. E.P.S. growth (-5.4%) has been above median.

In agreement with this pattern, consensus growth forecast (2.0%) is at the lower quartile.
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PRICE HISTORY

Over the full time period, DCP Midstream LP’s stock price performance has been variable and in line with the market. Between November, 2008 and September, 2019, DCP Midstream LP’s stock price rose +211%; relative to the market, this was a -6% loss. Significant price moves during the period: 1) January, 2016 – March, 2017: +109%; 2) June, 2014 – January, 2016: -67%; and 3) November, 2008 – February, 2012: +492%.
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TOTAL INVESTMENT RETURNS

Current annual total return performance of -27.3% is lower quartile relative to the S&P 500 Composite.
In addition to being lower quartile relative to S&P 500 Composite, current annual total return performance through July, 2019 of -27.3% is substantially below median relative to DCP Midstream LP Peer Group.

Current 5-year total return performance of -3.1% is lower quartile relative to the S&P 500 Composite.
Through July, 2019, with lower quartile current 5-year total return of -3.1% relative to S&P 500 Composite, DCP Midstream’s total return performance is above median relative to DCP Midstream LP Peer Group.
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VALUATION BENCHMARKS

Relative to S&P 500 Composite, DCP’s overall valuation is exceptionally low. All five factors are upper quartile. The highest factor is the ratio of enterprise value/earnings before interest and taxes, followed by the price/earnings ratio, then by the ratio of enterprise value/assets, then by the ratio of enterprise value/revenue. The lowest factor is the price/equity ratio.
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DCP Midstream has a major value gap compared to the median. For DCP to hit median valuation, its current ratio of enterprise value/revenue would have to rise from the current level of 1.00X to 1.31X. If DCP’s ratio of enterprise value/revenue were to rise to 1.31X, its stock price would be higher by $21 to $46.
For DCP to achieve upper quartile valuation relative to the DCP Midstream LP Peer Group, its current ratio of enterprise value/revenue would have to rise from the current level of 1.00X to 3.09X. If DCP’s ratio of enterprise value/revenue were to rise to 3.09X, its stock price would increase by $136 from the current level of $26.

VALUE TARGETS

DCP’s future returns on capital are forecasted to fall short of the cost of capital. Accordingly, the company is expected to continue to be a Value Eraser.
DCP Midstream LP’s current Price Target of $41 represents a +59% change from the current price of $25.56.
This moderately high appreciation potential results in an appreciation score of 66 (only 34% of the universe has greater appreciation potential.)
Notwithstanding this moderately high Appreciation Score of 66, the low Power Rating of 18 results in an Value Trend Rating of D.
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DCP Midstream LP’s current Price Target is $41 (+6% from the 2018 Target of $38 and +59% from the 09/10/19 price of $25.56). This slight rise in the Target is the result of a +6% increase in the equity base and a +0% change in the price/equity multiple. None of the Value Drivers has an impact on the price/equity multiple. The forecasted increase in growth has no impact on the multiple. The forecasted increase in cost of equity also has no impact and the decline in return on equity didn’t either.
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PTR’s return on equity forecast is 5.3% — in line with our recent forecasts. Forecasted return on equity suffered a dramatic, variable decline between 2010 and 2018. The current forecast is well below the 2012 peak of 12%.

PTR’s growth forecast is 18.0% — substantially above our recent forecasts. Forecasted growth enjoyed a dramatic, erratic increase between 2010 and 2018. The current forecast is significantly above the 2016 low of 0%.

PTR’s cost of equity forecast is 8.6% — in line with recent levels. Forecasted cost of equity erratic but little changed between 2010 and 2018. The current forecast is above the 2016 low of 6.6%.
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At DCP Midstream LP’s current price of $25.56, investors are placing a negative value of $-19 on its future investments. This view is consistent with the company’s most recent performance that reflected a growth rate of 15.0% per year, and a return on equity of 5.3% versus a cost of equity of 8.0%.
PTR’s 2020 Price Target of $41 is based on these forecasts and reflects an estimated value of existing assets of $48 and a value of future investments of $-7.

About John Lafferty 57444 Articles
During his career, John has developed valuation and stock rating methodologies, managed institutional portfolios and mutual funds, and provided equity research to institutional investors on thousands of companies. He has been Director of Research at PTR since its inception in 2004.

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