Pipeline stocks took a deep dive recently as FERC issued the final rule on electric storage participation in reginal markets. Here’s what FERC had to say:
“The Federal Energy Regulatory Commission (FERC) today voted to remove barriers to the participation of electric storage resources in the capacity, energy and ancillary services markets operated by Regional Transmission Organizations and Independent System Operators. This order will enhance competition and promote greater efficiency in the nation’s electric wholesale markets, and will help support the resilience of the bulk power system”
Dominion Energy Inc (NYSE: D) and Enbridge Inc (USA) (NYSE: ENB), two stocks we have talked a lot about, dropped accordingly with the new rule. Both companies have MLP exposure, but according to Tim Schneider, analyst at Evercore ISI the new tax-shouldn’t cause much trouble for these companies:
“Changes from the Federal Energy Regulatory Commission aren’t expected to hurt pipeline companies owned by so-called C-Corporations, including Kinder Morgan Inc., Oneok Inc., Enbridge Inc. and TransCanada Corp. Conversely, it’s likely to hurt MLPs with large amounts of “cost of service” exposure and particularly those with large amounts of interstate natural gas pipelines. This includes Williams Cos. and the Tallgrass family. Evercore ISI says the sector selloff is likely overstated.”
On the other side, Robert Kwan at RBC says “Among the companies that could be affected — Enbridge has MLP exposure through Enbridge Energy Partners and Spectra Energy Partners, and TransCanada has MLP exposure through TC Pipelines. However, there may be “offsets and opportunities” for Enbridge and TransCanada, including consolidation”
Keep in mind that both companies are already trading at very attractive prices (if current news is unjust). Dominion Energy is trading 25% above its 5-year yield average. If we state that fair value is close to the 5-year yield average, then fair value would be the current price, $71.30, divided by 0.75, which gives us a fair value at $95. Since the highest consensus estimate is $86, a fair value close to $95 is most likely too high, and could mean that the current yield is unjust. However, the mean consensus is $80.3, so there is a 9.2% positive spread towards the current price.
Same for Enbridge: The 5-year yield is 84% above its average and mean consensus is 32% higher than the current price. The total impact of the new rules is unknown and we advise investors to be risk-averse, meaning that if you choose to invest in either Dominion or Enbridge, adjust your position so that a significant drop wouldn’t hurt your portfolio that much. A good rule of thumb is to diversify each position by at least 6% and with higher risk objects such as Enbridge, reduce the weighting. In that way, if you’re wrong, your total performance is still intact.
The author owns stocks in both Dominion and Enbridge