Why Goldman Just Launched Sempra Energy At Buy, ITC At Sell, And 4 Other Utilities At Neutral

In a report published Tuesday, Goldman Sachs analysts mention that American Utilities continue to diversify into non-utility energy infrastructure, with Diversified Utilities seeking higher growth than their core regulated businesses.

Goldman Sachs upgraded Sempra Energy SRE to Buy, with a price target of $130, while maintaining a Neutral rating on Dominion Resources, Inc D, with a price target of $74.

The analysts initiated coverage of three Diversified Utilities with non-utility gas midstream with a Neutral rating - CenterPoint Energy, Inc CNP (with price target at $20), DTE Energy Company DTE (with price target at $82) and OGE Energy Corp OGE (with price target at $33).

ITC Holdings Corp ITC, among the Diversified Utilities with federally regulated electric transmission, was initiated with a Sell rating and a price target of $34.

In the report Goldman Sachs noted its key takeaways as:

• SRE emerges as our most attractive infrastructure story, with material upside from MLP/Yieldco formation and LNG expansion
• our out-of-consensus view on Sell-rated ITC, where we expect a more material reduction in regulated returns coupled with tapering growth; and
• general partner (GP) call options exist among Diversified Utilities with MLPs, some of which are pricing little to no value for GP interests.

"Diversification into non-utility energy infrastructure is a growing trend among Diversified Utilities seeking higher growth relative to their core regulated businesses." Among the companies that are investing in energy infrastructure, the analysts favor the following attributes:

1. Competitive Advantages in Favorable Markets: This suggests exposure to attractive markets (Marcellus/Utica and Mexican infrastructure), brownfield assets (LNG import terminals, Gulf Coast storage), and low cost of capital from existing or potential MLP/Yieldcos
2. Earnings and Growth Visibility: This suggests a stable regulatory environment with limited risk, long duration contracts with limited commodity exposure, and backlogs of high-quality projects with additional upside from high-probability projects
3. Capital Allocation Winners: The analysts like companies that are capable of investing in above-market returns and return capital to shareholders via above-average dividend growth and the potential to return excess cash to shareholders
4. Near-Term Catalysts: The analysts like companies that have growth upside from near-term development projects wins and strategic options such as MLP and/or Yieldco formation.

"Our in-depth analysis reveals SRE as our favorite infrastructure pick with material upside based on 1) our above-consensus earnings forecast (13% CAGR); 2) MLP/Yieldco formation upside ($13/sh); and 3) LNG expansion not in our forecast ($28-49/sh for 4-7 trains)," the analysts added.