Wells Fargo Downgrades Sempra Energy After Monday's Spike On Activist Involvement

Sempra Energy SRE has come under pressure to set its house in order following calls to overhaul its board and initiate a strategic review process by Elliott Management and Bluescape Energy.

The activist involvement sent the stock soaring Monday.

The Analyst

Wells Fargo Securities analyst Sarah Akers downgraded Sempra from Outperform to Market Perform and raised the price target from $118 to $123.

The Thesis

Following Monday's spike, Sempra shares trade at a slight premium to the regulated electric utility median, Akers said in a Monday note.

Opportunities exist to unlock value through "effective capital allocation and new growth ventures" that could materialize from a full-scale strategic and operational review, the analyst said. The LNG opportunities have a value of about $10 per share, and Sempra could have capex upside, neither of which have been accounted for, Akers said. 

The analyst is not convinced of Sempra's potential for multiple expansion, given below-average credit metrics and ongoing risks such as the impact of the Mexican election on the nation's energy policy, California wildfires and the construction timeline for a joint venture liquefied natural gas facility in Louisiana. 

"Our 12-18 month price target of $123/share (up from $118/share) is based on our sum-of-the-parts analysis (see Exhibit 1) and includes $5/share of upside potential," Akers said. 

Activist investors have ascribed a higher multiple to the natural gas facility and midstream operations, the analyst said. 

The Price Action

Sempra shares rallied 15.54 percent to $117.19 Monday after losing around 4 percent year-to-date through Friday. 

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