by Charles Fishman, CFA | Morningstar Research Services LLC | 04-02-20

We are reducing our CenterPoint Energy fair value estimate to $24 per share from $25.50 after COVID-19-related issues forced the company to slash its dividend and lower its 2020 capital expenditure target by $300 million. CenterPoint cut its dividend to an annual rate of $0.60 per share from $1.16 after 53.7%-owned Enable Midstream Partners announced that it would reduce its common unit distribution by 50%.

We had assumed about a 10% cut in Enable's distribution due to the dramatic decline in commodity prices, but not to the level to which it will be cut this quarter. The reduction will lower cash flow to CenterPoint by approximately $155 million on an annual basis. We believe the reduction in cash flow from Enable, supply-chain disruptions, and staffing issues due to the impact of COVID-19 will make it difficult for CenterPoint to fully execute our five-year $13.6 billion estimated capital investment plan. Thus, we lowered our estimate by about 9%, to $12.5 billion. The reduction in investment lowers rate base growth and reduces our 2024 EPS estimate by $0.10, to $1.47.

On a positive note, regulatory actions by the Public Utility Commission of Texas, we believe the first in the country, should reduce the amount of unrecovered costs associated with COVID-19. Costs due to the suspension of disconnects for nonpayment can now be collected in a surcharge. In addition, PUCT issued an accounting order allowing Houston Electric to defer for recovery in a future rate case other costs associated with the pandemic.

The action by PUCT will help mitigate some of the COVID-19 earnings pressure, but we don't believe the drop in electricity demand will be immediately recovered. The stay-at-home order for the Houston area has been extended to April 30, significantly reducing commercial and industrial electricity demand. Thus, we have lowered our 2020 EPS estimate to $1.21 from $1.35.

We Continue to Forecast Compass Minerals' Profit Recovery in 2020
by Seth Goldstein, CFA | Morningstar Research Services LLC | 03-30-20

We are maintaining our $81 per share fair value estimate after reviewing our near-term assumptions for Compass Minerals in the wake of the economic impact of the COVID-19 pandemic. Our wide moat rating is also unchanged.

At current prices, we view Compass Minerals as significantly undervalued, with shares trading in 5-star territory. Compass shares have traded off in excess of the broader market decline, as investors are concerned about the company's elevated leverage. However, we view Compass' salt and fertilizer businesses as relatively more insulated from an economic slowdown. We continue to expect companywide profits to materially rebound as the Goderich salt mine continues to increase production, reducing unit production costs. As such, Compass should generate enough cash flow to meet its debt obligations in the near term.

Compass' salt business, which generates over 70% of profits, is relatively insulated from economic disruptions. This is because roughly 80% of salt sales come from deicing salt to governments and consumers, who purchase salt based on snowfall instead of economic activity. For example, during the Great Recession, Compass Minerals saw higher salt volumes in 2008, as that year had a higher number of snow days than average. As a result, during both 2008 and 2009, Compass Minerals was able to raise deicing salt prices. While we expect deicing salt sales to remain steady, we have trimmed our 2020 salt volume forecast to account for lower industrial-related volumes. However, we expect the lower industrial volumes to be short-lived and have not changed our long-term assumptions.

In Compass' North American fertilizer businesses, we continue to forecast a recovery in volumes as farmers plant more crops across the U.S. following the lowest acres planted in over a decade in 2019. Further, the South American harvest has been underway with few disruptions and the fertilizer business should continue to see solid demand as a result.

Compass' financial leverage remains elevated, with net debt/adjusted EBITDA at 4.1 times at the end of 2019. However, of Compass' $1.4 billion in total debt, only $52.1 million matures this year. The relatively low near-term maturities should give Compass time to divest its South American fertilizer business without being a forced seller. This should allow the company to receive a fair price and use the proceeds to reduce debt, restoring the balance sheet to more healthy levels.

COVID-19 Likely to Pressure FirstEnergy's C&I Sales and Capital Investment
by Charles Fishman, CFA | Morningstar Research Services LLC | 03-30-20

We are reducing our fair value estimate to $44 per share from $45 for FirstEnergy due to the impact of COVID-19 on earnings and capital investment. We believe supply chain disruptions and staffing issues will make it difficult for FirstEnergy to fully execute our five-year, $15.6 billion capital expenditure estimate. Thus, we have reduced our 2020-24 capital expenditures by $900 million, to $14.7 billion.

Lower revenue, higher expenses, and lower investment reduced our average annual EPS growth rate between 2020 to 2024 by about 30 basis points, to 6.2%. Our 2023 estimate of $2.88 per share, a $0.12 reduction from our prior estimate, is now slightly under the guidance range that was initiated in early February and before the full impact of COVID-19 on the economy was realized.

We reduced our 2020 EPS estimate to $2.30 from $2.52, below the guidance range of $2.40-$2.60. In the near term, FirstEnergy will likely experience a significant reduction in usage from commercial and industrial customers following stay-at-home orders for Ohio, New Jersey, and West Virginia. On March 28, Pennsylvania Gov. Tom Wolf expanded stay-at-home orders to 22 of the state's 88 counties, roughly 75% of the state's population. In 2019, C&I costumers represented about 64% of FirstEnergy's retail electric sales.

Pfizer Is Likely to Face Some Disruptions from Coronavirus Concerns
by Damien Conover, CFA | Morningstar Research Services LLC | 04-03-20

We are slightly reducing our fair value estimate for Pfizer to $44 from $46 based on likely coronavirus disruptions to Pfizer's drug portfolio. Specifically, we expect new drug launches for oncology drugs Xtandi, Mektovi, and Braftovi along with cardiovascular drug Vyndaqel to stagnate a bit while patients and doctors are less inclined to try new treatments, resulting in $500 million (1% of total sales) less sales for these drugs collectively in 2021. Also, we expect entrenched drugs Eliquis (for atrial fibrillation) and Ibrance (for breast cancer) to bring on fewer new patients as people avoid checking on ailments, cutting off close to $600 million (1% of total sales) in 2021. Additionally, we expect vaccine sales for Prevnar 13 to fall (especially for adult patients) as older patients try to avoid doctor offices and hospitals due to concerns around contracting the coronavirus.

Permian Oil Differentials Have Blown Out Again; The Situation Does Not Rhyme with 2018
by Stephen Ellis | Morningstar Research Services LLC | 04-01-20

Permian oil differentials have blown out again as the Midland and Houston corridors are trading about $7 and $5 per barrel below WTI (West Texas intermediate), and spreads have been as wide as $10 a barrel recently. This means that some producers are getting as low as $10 a barrel for oil, a far cry from the current $20 trading levels. However, the situation is not like 2018, where Permian differentials blew out temporarily due to a short-term mismatch between a lack of pipeline capacity and ramping supply at much higher oil price levels, which was resolved with new pipeline capacity. The current environment is a combination of a demand and supply shock, to the extent that midstream firms such as Plains have been requesting that Permian producers scale back production as well as prove they have a ready buyer for their barrels as local Permian storage is being overwhelmed. We do not see any fair value or moat impacts to our coverage universe, but this does demonstrate the industry shake-out is occurring and investors should be aligned with quality operators on both the midstream and E&P side.

We think there are several takeaways. Owners of oil storage such as Plains, Enterprise Products Partners, and Magellan are likely to reap substantially higher profits as storage rates and volumes increase. Also, like in 2018, we broadly expect our E&P coverage to be largely insulated from wider spreads, given the focus on long-term fixed fee transportation agreements. Diamondback, for example, has less than 10% of its production exposed to wider differentials and is nearly fully hedged.

We also see negatives. The challenge will be for the non-investment-grade producers, private equity-backed E&Ps, and other private E&Ps that largely took the brunt of wider spreads in 2018 and are exposed again now due to the lack of long-term pipeline agreements to survive with even weaker pricing and unknown, but likely questionable liquidity. Finally, with the shake-out in process, we think this speaks to the substantial uncertainty around volumes and fees for gathering and processing entities such as Targa and DCP. We reiterate our extremely uncertainty ratings for both stocks.

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