Upgrade of Enagas S.A by BofA Securities

Analysts at BofA Securities, in a note dated Wednesday, upgraded Enagas S.A (OTC:ENGGY) (BME:ENAG) from underperform to neutral. This change follows the stock’s underperformance compared to its Spanish peer, Red Eléctrica, and the sector, across 900 to 1,250 basis points during Q3.

Justifications for the Upgrade

The analysts identified several factors justifying this upgrade, notably the recent €1.1 billion disposal of Tallgrass Energy, which is considered to strengthen Enagas’ balance sheet and enhance its earnings visibility.

Cautionary Notes

Despite the financial boost from the disposal, the upgrade is approached with caution due to persistent risks:
– Ongoing arbitration concerning the Gasoducto Sur Peruano project, which continues to pose a significant risk.
– Uncertainty around ambitious plans for Green Hydrogen infrastructure, as Enagas’ successful adaptation to this emerging market is still in question.

The Green H2 sector is in its early stages, leading BofA to refrain from including it in their current valuation due to unclear costs, timelines, and potential subsidies.

Updated Price Objective

BofA increased their price objective for Enagas to €14.8 per share from €14.1, indicating a 7% upside potential. This revision is based on a sum-of-the-parts valuation and reflects a more favorable outlook on Spanish regulatory returns expected to improve by year-end.

Future Challenges

However, BofA warns that Enagas’ forthcoming investments in hydrogen projects may require prioritization of capital expenditures over dividend distributions beyond 2026.