Comparable company analysis
In the previous article in this series, we covered DCP Midstream Partners’ (DPM) distribution and coverage. In this article, we’ll take a look at DCP Midstream’s valuation compared to its peers.
As you can see in the table below, Oneok Partners (OKS) is the largest company in our select group of peers. TC Pipelines (TCP) is the smallest company by market capitalization and enterprise value (or EV).
Of the companies listed in the above chart, TC Pipelines (TCP) has the highest EV-to-EBITDA (earnings before interest, taxes, depreciation, and amortization) multiple of 22.6x. Targa Resources Partners (NGLS) has the lowest EV, approximately the summation of its equity value and net debt, when scaled by EBITDA. DCP Midstream Partners’ (DPM) EV-to-EBITDA of 12x is in line with its peers.
Analysts’ consensus forward EV-EBITDA multiple is the lowest for Targa Resources Partners at 8.7x for 2015. DCP Midstream’s (DPM) projected EV-EBITDA multiple of 10.4 is at par with the group average.
Forward EV-to-EBITDA is a useful metric to gauge relative valuation. A lower forward multiple compared to the present ratio typically indicates expectations of EBITDA growth for the period. DCP Midstream Partners is 2.45% of the Alerian MLP ETF (AMLP).
Distribution yield and coverage ratio
DCP Midstream’s (DPM) distribution yield is one of the highest in the group, while Boardwalk Pipeline Partners’ (BWP) distribution yield is the lowest at 2.5%. In a master limited partnership (or MLP), distribution yield is the amount of cash distribution per unit relative to the unit price. Typically, MLPs with a strong distribution growth history and sufficient growth projects have lower distribution yield because of higher unit price.
DCP Midstream’s coverage ratio is one of the lowest in the group. Coverage ratio is the distributable cash flow divided by distributions to limited partners (or LPs), usually calculated on a per-unit basis. The higher the ratio, the greater the safety of the distribution.
DCP Midstream’s net debt-to-EBITDA multiple of 4.1x is in line with the group. A higher multiple could indicate a potential liquidity crunch, or insufficient cash to repay debt, particularly when crude oil prices are falling.
DCP Midstream’s estimated earnings growth rate at 4.8% is the lowest in the group compared to 14% for NGLS, 16.9% for BWP, 7% for TCP, and 6.3% for OKS. A lower-than-expected growth rate for DCP Midstream reflects its lower distribution yield.
In the next part of this series, we’ll learn what Wall Street analysts’ recommendation is for DCP Midstream (DPM).