DCP versus natural gas
DCP Midstream (DCP) is in fifth place in terms of correlation with natural gas following Legacy Reserves (LGCY). The three-month correlation between DCP and natural gas was 0.29 as of November 27, 2017. DCP Midstream’s correlation with natural gas reflects its direct commodity price exposure mainly through its natural gas processing business. DCP is one of the largest natural gas processors in the US.
The partnership expects 60% of 2017 estimated gross margin to come from fee-based sources, 18% from commodity-hedged sources, and the remaining 22% to be linked to commodity prices.
Impact of natural gas volatility on DCP’s 2017 guidance
DCP Midstream expects its 2017 EBITDA to come in under the midpoint of its 2017 EBITDA guidance of $940 million to $1,110 million due to the lower commodity price outlook compared to its commodity price assumptions. DCP’s commodity price assumptions for 2017 were as follows:
- natural gas: $3.00 to $3.50 per MMBtu (million British thermal units)
- crude oil: $50 to $60 per barrel
- NGLs: $0.50 to $0.65 per gallon
The partnership’s recent commodity price outlook expects average natural gas price, crude oil, and NGLs to be $3.1 per MMBtu, $49.71 per barrel, and $0.59 per gallon, respectively, for 2017.
DCP expects a $0.10 per MMBtu change in natural gas prices, a $1 per barrel change in crude oil, and a $0.01 per gallon change in NGL prices to impact its earnings by $7 million, $4 million, and $5 million, respectively. DCP expects to lower its commodity price exposure through increased focus on fee-based NGLs and its natural gas logistics business.
53.8% of analysts surveyed by Reuters rate DCP Midstream as a “hold” as of November 27, 2017, 30.8% rate it as a “buy,” and the remaining 15.4% rate it as a “sell.” The partnership is currently trading close to the low range ($33) of analysts’ target prices. DCP’s average target price of $37.1 implies ~12% upside potential from the current price levels.
In the next article, we’ll look into the correlation between Black Stone Minerals (BSM) and natural gas.
In this article, we’ll look into the commodity price exposure of the MLP at the seventh spot, Enterprise Products Partners (EPD).
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