Top Picks 2017: Pattern Energy Group

01/20/2017 7:00 am EST


Roger Conrad

Chief Analyst/Managing Partner, Capitalist Times

Our Top Pick for more aggressive investors has been volatile since private capital firms Riverstone Holdings and Carlyle Group rolled it out as a “yieldco” to the public in September, 2013, notes Roger Conrad, editor of Conrad’s Utility Investor.

Now priced to yield 8.6 percent, Pattern Energy Group (PEGI) trades 14 percent below its IPO price of $22 per share. That current dividend alone assures a hefty cash return for investors in 2017.

But there are at least three powerful potential catalysts to generate hefty capital gains as well.

First is simply more distribution growth. Pattern’s cash available for distribution in the first nine months of 2016 increased by 62.3 percent, keeping it on track for a targeted full-year gain of 46 percent.

Pattern has increased its payout every quarter since July 2014. The next boost is expected in February and should be in line with a full-year hike in at least the upper single digits.

The company has $433 million undrawn on a $468 million credit line maturing in 2018 and no bond maturities until 2020. That ensures low cost debt funding for growth.

The second potential catalyst is an improvement in dismal investor perceptions of yieldcos and prospects for renewable energy in particular.

Conventional wisdom now is that President-elect Trump will shatter prospects for renewable energy.

But success is far from guaranteed, given the bipartisan majority that passed wind and solar tax credits. Moreover, the primary driver of utility scale wind and solar adoption is support in states, including Texas.

Catalyst number three is a potential takeover by Pattern’s parents Riverstone and Carlyle, which each own 19.39 percent of the company. The pair took Talen Energy fully private in early December.

Long-term cash flow is arguably more attractive at Pattern than Talen. And with a market cap of $1.7 billion, Pattern Energy would also be in the same ballpark with Talen’s $1.8 billion buyout.

A mid-$20s price would be a huge discount from the IPO for Riverstone and Carlyle. Just the possibility is also a backstop to the company’s share price.

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