Chevron Corporation has agreed to snap up master limited partnership Noble Midstream in an all-stock deal to simplify governance and corporate structure. Shares of the global energy company increased 4.3% to close at $109 on March 5.
Per the terms of the deal, Chevron (CVX), which has majority holdings in Noble Midstream, will acquire all 33.925 million of the publicly held common units, representing the limited partner interests in Noble Midstream. Notably, these units are not owned by Chevron.
Unitholders of Noble Midstream (NBLX) will receive 0.1393 shares of Chevron common stock for each unit held. The transaction, which awaits certain customary approvals, is likely to close in the second quarter of this year.
Chevron VP Colin Parfitt said, “We believe this buy-in transaction is the best solution for all stakeholders, enabling us to simplify the governance structure and capture value in support of our leading positions in the DJ and Permian basins.” (See Chevron stock analysis on TipRanks)
On Feb. 16, Credit Suisse analyst Manav Gupta increased the stock’s price target to $115 (5.5% upside potential) from $110 and maintained a Buy rating. The analyst noted, “Chevron is fully committed to dividend growth and even buybacks.”
Based on his current estimates, Gupta believes Chevron will fully cover the dividend and generate “over $4.5B in discretionary free cash flow in 2021.”
The consensus rating among analysts is a Strong Buy based on 10 Buys versus 3 Holds. The average analyst price target stands at $107.42 and implies downside potential of about 1.5% to current levels over the next 12 months. Shares have gained 35% over the past year.
Chevron scores a “Perfect 10” from TipRanks’ Smart Score rating system, indicating that the stock has strong potential to outperform market expectations.
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Costamare (CMRE), an owner and operator of containerships, has rallied 96% in the last six months, and a key reason for the upside has been a gradual uptick in global economic activity.
Even after this surge, CMRE stock remains undervalued. For FY2020, the company reported an adjusted EPS of $1.02. With a share price of $9.80, it implies a current P/E ratio of 9.6. Thus, considering broad market valuations, CMRE stock is attractive. In addition, it offers a healthy dividend yield of 4.1%.
It’s important to note that the charter rates for the containership market depends on the level of global trade. Therefore, GDP growth is an important consideration.
According to the IMF, the global economy contracted by 3.5% in FY2020, and in the current year, global economic expansion is likely to land at 5.5%. Meanwhile, the World Bank has a relatively conservative economic expansion forecast of 4% for 2021. In any case, it seems likely that the economy will continue to accelerate through FY2021.
Given this potential bounce back in economic activity, charter rates increased by 170% in the second half of 2020. This explains the 109% rally in CMRE stock.
A Healthy Order Backlog Provides Revenue Visibility
Costamare has a clear revenue and cash flow visibility. As of Feb. 2021, the company reported contracted revenues of $2.4 billion, with an average time charter of 4.4 years. With this cash flow visibility from contracts, the dividends are secure.
What’s more, the company also has a low counterparty risk. The order backlog is from companies that include Maersk, Hapag-Lloyd, Yang Ming and Costco Shipping. Therefore, the potential cash flow is secure.
It should also be noted that the company has reported 20 new or extended charter agreements since Q3 2020. These agreements had an incremental impact of $440 million on the backlog, and as economic activity improves, the backlog is likely to remain robust.
Costamare continues to acquire new containerships and given the growth in demand and the company’s financial flexibility, new containerships are likely to add to the backlog.
On top of this, as of January 2021, the containership orderbook (as a percentage of the total fleet) was 10.1%. The order book is at its lowest level in over a decade. To this end, the demand supply scenario is likely to remain tight, and this will support charter rates.
Strong Fundamentals Give CMRE Financial Headroom
From a balance sheet perspective, Costamare has total debt of $1.5 billion as of December 2020. However, the book value of assets is $2.4 billion. This implies a loan-to-value of 60% and provides Costamare with financial headroom. Costamare also has no significant debt maturity until FY2024.
In addition, the company’s EBITDA interest coverage ratio was 5.13 as of Q4 2020. Therefore, debt servicing is likely to remain smooth. With charter rates trending higher, credit metrics should further improve in FY2021.
In terms of cash flows, Costamare reported operating cash flow of $274 million for FY2020. Even amid challenging market conditions, cash flows were higher as compared to FY2019. It’s very likely that operating and free cash flow will improve further in the current year.
Adding to the company’s financial flexibility is a cash position of $209 million as of Q4 2020. Overall, Costamare has a low financial risk after navigating the worst of the economic crisis.
Analysts Weigh In
Only one analyst has thrown an opinion into the mix recently, rating the stock a Buy and assigning an $11 price target. This puts the upside potential at 12%. (See Costamare stock analysis on TipRanks)
Concluding Views
Costamare has paid dividends for 41 consecutive quarters since the IPO, and as the containership market witnesses a recovery, it’s likely that dividends will increase in the coming quarters. This is a potential stock re-rating trigger.
Further, the P/E-based valuation suggests that there is more fuel in the tank.
Disclosure: On the date of publication, Faisal Humayun did not have (either directly or indirectly) any positions in the securities mentioned in this article.
Disclaimer: The information contained herein is for informational purposes only. Nothing in this article should be taken as a solicitation to purchase or sell securities.