December 6, 2023
AltaGas Ltd.
Investor Day: The road ahead looks rosy
Our view: The Investor Day clearly laid out the strategic priorities (i.e., equity self-funding model; commercial de-risking; continued deleveraging; optimizing returns; and disciplined capital allocation), which we believe will result in share price appreciation. However, if the share price does not reflect fair value over the medium term, we think that management is willing to take tangible steps to improve shareholder value (e.g., share buybacks; changes in corporate structure).
Key points:
De-risking cash flow strengthens the base business and lays the groundwork for REEF. For 2024, AltaGas has 54% of its expected Midstream EBITDA secured under take-or-pay or fee-based contracts with a long-term target of having 70% of EBITDA under those contract types. The company is looking to secure tolling arrangements for 50-60% of its total Global Exports capacity with an average duration of 5-7 years prior to reaching a positive final investment decision for its Ridley Island Energy Export Facility (REEF).
Committed to reducing debt/EBITDA towards 4.5x; longer-term goal of building "dry powder". AltaGas continues to see the sale of its 10% stake in the Mountain Valley Pipeline (MVP) as the most immediate path to moving towards its goal, and it will evaluate an MVP sale as the project moves towards completion. Longer term, AltaGas would like to drive leverage below its 4.5x debt/EBITDA target to create balance sheet optionality.
Equity self-funding model is a key priority and AltaGas will dial back capex if necessary to stay self-funded. The company specifically highlighted its equity self-funding model as one of its top five strategic priorities, and it expects to have $1.3-1.5 billion of annual investment capacity through 2028 without issuing common equity (i.e., no DRIP, ATM or discrete common equity issuance).
Guidance for 2024 supports our existing estimates. AltaGas provided its guidance ranges for 2024 EBITDA of $1.675-1.775 billion, which compares to our forecast heading into the release of $1.739 billion (unchanged) and consensus of $1.717 billion (nine estimates; range of $1.652-1.770 billion). For EPS, the company's guidance is $2.05-2.25, which compares to our forecast heading into the announcement of $2.16 (unchanged) and consensus of $2.14 (nine estimates; range of $2.02-2.24).
Dividend increased by 6% with attractive payout ratio messaging. The new annualized rate is $1.19/share, which is essentially in line with our forecast for an increase to $1.18/share. Looking forward, AltaGas stated that it "remains committed to delivering regular, sustainable, and annual dividend increases" in the 5-7% CAGR range through 2028, while further noting that it wants to maintain a "prudent" payout ratio target of 50-60% of earnings, which it believes will allow for sufficient retained cash flow to continue its equity self-funded growth model.