Analyst Note| Stephen Ellis |
After taking a fresh look at Energy Transfer, Kinder Morgan, and Williams, we have made several changes. We now believe Kinder Morgan has earned a narrow moat rating, similar to peer Williams, while Energy Transfer remains without a moat. Further, after updating for third-quarter results, we are reducing our fair value estimates for Kinder to $17.50 per share from $21 and for Energy Transfer to $16.50 per unit from $18.50. The main driver of our fair value estimate reductions is tempered growth expectations for pipeline projects, as midstream firms are increasingly assigning higher cost of capital assumptions to pipes to account for increased stakeholder projects. More specifically, our adjusted return on invested capital forecasts are 100-300 basis points lower than prior forecasts to 7%-8% over the next few years. Renewable efforts, while actively being explored across all three firms, are not yet material enough to replace the lost earnings growth in the near to medium term. For Williams, our narrow moat rating and $28 fair value estimate are unchanged.