While selling a 10% stake in its infrastructure arm to an Abu Dhabi Investment Authority unit for nearly $1.8 billion in cash should boost Sempra's stock price, a full valuation recovery may require disclosing the long-term outlook for Sempra Infrastructure Partners, power sector equity analysts said.
The transaction announced Dec. 21 followed a similar deal with private equity giant KKR & Co. Inc., which in October agreed to buy a 20% interest in Sempra Infrastructure for $3.37 billion. Sempra intends to use the proceeds from the Abu Dhabi Investment Authority sale to help fund capital expenditures at its utilities and to buy back $500 million of the company's shares, which had gained just over 1.5% as of midday trading Dec. 22.
Industry analysts applauded the buybacks but noted that there is room for stock price improvement.
"We believe investors may want to see either a greater [Sempra Infrastructure Partners] sell-down or more clarity on Sempra's LNG buildout for SIP to get an appropriate valuation," Mizuho Securities USA LLC told clients Dec. 22.
In addition to the Cameron LNG facility operating in Louisiana, Sempra also plans to build the Energía Costa Azul terminal in Mexico, which could start producing liquefied gas in late 2024. The company is also developing another Gulf Coast export terminal in Texas as well as an additional project on Mexico's Pacific Coast. An expansion of Cameron LNG, meanwhile, is due for a final investment decision at the end of 2022.
Wells Fargo Securities agreed that even though it does not expect the recently announced deal "to address the sum-of-the-parts discount implied in [Sempra's] stock price, we nonetheless welcome the valuation marker along with a further shift in the mix toward regulated operations."
Sempra management previously has stated that it may also opt to sell its infrastructure subsidiary or spin it off, Guggenheim Securities LLC wrote in a Dec. 21 note to clients, adding that either transaction would require additional firm LNG capacity. In the meantime, according to KeyBanc, the stake sell-downs "should establish investor confidence in the business especially as the global LNG trends improve."
The U.S. is set to become the world leader in LNG export capacity in 2022, while gas deliveries to U.S. LNG export terminals surged to record levels at the end of November.
The KKR and Abu Dhabi Investment Authority deals also indicate "private interest in infrastructure as a source of funds for [Sempra] to recycle capital into regulated utilities," Guggenheim Securities noted.
Private equity firms have dominated the market for North American power company fossil fuel assets, and industry experts expect to see more minority stake deals in 2022 as another substitute for traditional capital raises.
