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Market Price (8/5/2016): $22.67/share; ST-Target: $26/share; NIV: $40/share
We expect ENBL sale for cash to spur strategic redirection and growth
Raising our NIV/share to $40 from $36. We agree with divestiture of CNP’s stake in Enable Midstream Partners (ENBL), and CNP gave OGE a 60-day right of first offer (ROFO) notice. We believe OGE would take advantage of the ROFO, and we believe that CNP would accept. Although timing is poor, CNP would sell cheap but also have opportunity to buy cheap. Disposition of ENBL is likely to be dilutive, but lowers risk, which increases multiple, and proper redeployment of capital could make-up for the dilution, in our opinion. It would not surprise us to see CNP delve back into pipeline business with proceeds from ENBL sale. CNP appears to be open to doing stock deal for ENBL, but we’re not sure that would change anything strategically. However, we do not want to see ENBL proceeds go towards share repurchases. We strongly agree with decision not to convert its Texas T&D assets to a REIT. Acquisition of Continuum isn’t dazzling us but signals serious commitment to Energy Services, and we’re not necessarily opposed to this modification in strategy. However, lack of strong utility and other regulated growth projects hamper CNP’s valuations, in our opinion, despite a healthy dividend yield. However, we believe CNP’s targeted CAGR in AEPS of 4%-6% is well within sight and may take a boost with Continuum and redeployment of capital from sale of ENBL. Demographics continue to provide a tailwind.