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Looking at DCP Midstream’s Current Valuations

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DCP Midstream’s price-to-distributable cash flow

DCP Midstream LP (DCP) is currently trading at a price-to-distributable cash flow of 10.9x. The partnership is trading above the ten quarters’ historical average of 8.0x. However, the partnership is still trading below the levels before the rout in energy prices.

Among DCP’s peers, Crestwood Equity Partners (CEQP), EnLink Midstream Partners (ENLK), and Energy Transfer Partners (ETP) saw a similar decline in their valuations since the rout in energy prices.

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The sudden increase in DCP’s price-to-DCF ratio from 4Q16 might reflect the expected growth in its distributable cash flows and the industry-leading position in the prolific Permian, DJ Basin, and STACK regions following the completion of its merger with the GP. At the same time, DCP’s current valuation could be high considering the expected increase in leverage, flat distributions, and higher commodity exposure.

DCP Midstream’s EV-to-adjusted EBITDA multiple

DCP Midstream’s EV-to-adjusted EBITDA[1. enterprise value to earnings before interest, tax, depreciation, and amortization] ratio using a trailing 12-month adjusted EBITDA is 13.0x. The current EV-to-EBITDA is above the last ten quarters’ average of 10.0x.

DCP’s forward EV-to-EBITDA multiple, which is based on the next-12-month EBITDA estimate, is 7.7x. DCP’s forward EV-to-EBITDA multiple is below the peer median of 12.6.

The EV-to-EBITDA ratio can be misleading in understanding the unit valuation of limited partner units. This is because the entire EBITDA in the EV-to-EBITDA ratio calculation may not be available to limited partners.

DCP Midstream has IDRs (incentive distribution rights) in its structure. Currently, it operates in the highest distribution tier with a 50% split. This split means that its sponsors, Spectra Energy (SE) and Phillips 66 (PSX), receive 50% of incremental cash flows.

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