March 10, 2024
AltaGas Ltd.
Poised for a breakaway from the peloton
Our view: We believe AltaGas' path to execute its strategic priorities remains intact following its in line Q4/23 results. Specifically, we expect AltaGas' ability to deliver above average growth on an equity self-funded basis, commercial de-risking of its midstream business via additional tolling contracts for LPG exports, and deleveraging of its balance sheet to result in share price appreciation throughout 2024 and beyond.
Key points:
Reinforcing the December 2023 Investor Day messages, including the equity self-funding model and deleveraging plan. AltaGas continues to expect to fund its capex through a combination of internally generated cash flow and investment capacity associated with rising EBITDA levels, with no expectation to issue any new common equity (i.e., no DRIP, ATM or
discrete common equity issuance). It also maintained its target 4.5x debt/ EBITDA (versus 5.2x at the end of 2023), with the sale of its 10% stake in the Mountain Valley Pipeline (MVP) offering the quickest path to its goal. AltaGas now expects this asset to be placed into service in Q2/24.
Taking steps to grow and commercially de-risk the Midstream business. We believe a higher degree of long-term tolling contracts (i.e., more stable cash flow) will result in valuation multiple expansion, while also helping underpin the Ridley Island Energy Export Facility (REEF) project. AltaGas continues to see a path towards having 60%+ of its global export volumes under tolling agreements over a multi-year time horizon (up from 40% at the end of 2023), citing strong ongoing demand in Asia as well as higher available LPG supply in Western Canada. If AltaGas is able to achieve over 60%+ of Global Exports volumes under long-term tolling contracts, we believe the Midstream segment could re-rate at least 1x EBITDA higher in our sum-of-the-parts valuation (i.e., about $2/share).