DCP Midstream: Sixth-Highest Correlation with Crude oil
DCP Midtream versus crude oil
DCP Midstream (DCP) is sixth in terms of its correlation with crude oil among midstream companies. The one-year correlation between DCP Midstream and crude oil was 0.44 as of February 6, 2018. DCP Midstream’s high correlation with crude oil reflects its significant involvement in the natural gas processing and NGLs (natural gas liquids) businesses. DCP Midstream is one of the largest natural gas processors and NGLs producers in the US. DCP Midstream’s total natural gas processing capacity was 7.8 billion cubic feet per day as of December 31, 2017.
Interested in DCP? Don't miss the next report.
Receive e-mail alerts for new research on DCP
According to a recent investor presentation, DCP Midstream has hedged ~15% of its 2018e gross margin as of December 29, 2017. At the same time, ~60% of the 2018e gross margin is fee-based, while ~25% is linked to commodities. The partnership is targeting ~80% of the 2018e gross margin to be fee-based and hedged—slightly lower than the 2017 targets. Strong crude oil prices could be the major reason behind the partnership’s less aggressive hedging program for 2018.
Reducing commodity exposure
Strong crude oil prices benefit the partnership’s commodity-linked margins—with high downside risk. Having said that, the partnership plans to lower its downside risk through hedging and focus on high margin and fee-based logistics businesses. DCP Midstream plans to focus on natural gas and NGLs pipeline expansion.
DCP Midstream expects to spend ~50% of its total project backlog ($1.5 billion–$2.0 billion) on logistics expansion including the Sand Hills NGL Pipeline and the Gulf Coast Express Gas Pipeline. Recently, DCP Midstream announced the final investment decision with Targa Resource (TRGP) and Kinder Morgan (KMI) to jointly develop the Gulf Coast Express Pipeline project. The $1.7-billion project would transport ~1.92 billion cubic feet per day of natural gas from Permian Basin to Gulf Coast. DCP Midstream owns 25% of the joint venture.
DCP Midstream has seen two rating upgrades since the beginning of this year. Bank of America lowered the partnership to “neutral” from “buy,” while Goldman Sachs upgraded the partnership to “neutral” from “sell.” Of the analysts surveyed by Reuters, 66.7% rated DCP Midstream as a “hold,” 26.7% rated it as a “buy,” and 6.6% rated it as a “sell.”
In the next part, we’ll discuss the correlation between American Midstream Partners and crude oil.