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DCP Midstream (DCP) Up 37.2% in 3 Months: More Room to Run?

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DCP Midstream, LP’s units have increased 37.2% in the past three months, outperforming 11.3% rise of the industry. Headquartered in Denver, CO, DCP Midstream is a leading energy infrastructure firm, with a market cap of $6.5 billion. It continues to benefit from the strong and sustaining business strategy, with a diversified portfolio of midstream assets across nine states.

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Can It Retain Momentum?

The answer is yes and here’s why we think so:

DCP Midstream’s business model is designed to earn stable fee-based revenues from key midstream assets that are being utilized by shippers and customers over a long period. Its massive network of almost 57,000 miles of pipeline infrastructure provides clients with intricate connectivity. Moreover, 37 natural gas processing plants help it generate high cash flow. Its Spindletop natural gas storage unit in Southeast Texas, with 12 billion cubic feet of capacity, is also a major positive.

The partnership’s ability to generate huge amount of free cash flow from operations is impressive. In fact, it expects excess free cash flow to rise more than 60% in 2021 to $310-$460 million from the 2020 level of $237 million, after paying distributions and capital expenditure. This high level of excess free cash flow reflects the Zacks Rank #3 (Hold) firm’s tremendous strength in operations.

DCP Midstream’s cost-reduction efforts through the utilization of an established task force have enabled the partnership to boost profits. Moreover, its lean manufacturing platform has substantially decreased wastage and increased profits. Also, DCP Midstream expects expansion capital expenditures and equity investments within $25-$75 million in 2021, indicating a significant decline from $205 million in 2020, to navigate through the coronavirus pandemic.

However, there are a few factors that are holding back the stock from reaching its true potential. At the end of first-quarter 2021, the partnership reported long-term debt of $5,178 million, and cash and cash equivalents of only $5 million, reflecting high leverage. This can affect DCP Midstream’s financial flexibility. As such, paying off the current debt amount of $504 million can become hectic for the firm and it will resort to availing the existing credit facility. Its excess cash flow generation ability can provide some breather.

Also, even though commodity prices underwent recovery at a record speed, shale producers are discouraged from explosively ramping up production. This suggests lower volumes in their pipelines. Nevertheless, we believe that DCP Midstream’s systematic and strategic plan of action will drive long-term growth.

Stocks to Consider

Some better-ranked stocks from the energy space include Pembina Pipeline Corporation (PBA - Free Report) , Antero Resources Corporation (AR - Free Report) and Magellan Midstream Partners, L.P. , each having a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Pembina’s bottom line for 2021 is expected to jump 42.2% year over year.

Antero Resources’ profits for 2021 are expected to surge 369.6% year over year.

Magellan Midstream’s bottom line for 2021 is expected to rise 7.2% year over year.

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