Petrogas Tuck-In ~5% Accretive; Target to $37 vs. $36 and Still Top Pick

Bottom Line:

ALA's $285M Petrogas tuck-in acquisition is strategic, accretive, and requires no new equity. The anticipated accretion from the deal partially offset by a higher WACC assumption drives our target price to $37 from $36. With an attractive potential total return of ~44% and relative valuation (forward P/E of ~13x vs. utilities at ~19x and midstream at ~16x), we're maintaining our Outperform rating and Top Pick designation.

Key Points

Acquiring remaining interest in Petrogas. ALA has announced that it has purchased the remaining 25.97% equity interest of Petrogas Energy Corp that it did not already own for $285M from Idemitsu. Effective July 5, ALA has 100% ownership of Petrogas (recall its previous $715M purchase of an additional 37% stake). Petrogas, based in Calgary, provides crude oil and NGL marketing services to propane retailers, refiners, and petrochemical producers across North America and also owns and operate the Ferndale Washington LPG export facility, the only terminal on the U.S. Pacific Coast.

Advances global export strategy. The acquisition in particular solidifies ALA as the go-to LPG exporter on the West Coast for producers and could unlock value through new growth and optimization reinforcing its strategic incumbent position. It also demonstrates ALA's shrewd asset recycling program (i.e. monetizing non-core assets at above market multiples and acquiring strategic assets below). ALA also intends to maintain an important partnership with Idemitsu as a LPG off-take customer as well as potential collaboration on prospective energy transition/lower carbon projects.

Funded with recent asset sales and debt. ALA funded the purchase with recycled capital primarily from the ~$224M sale of its non-operated interest in the Aitken Creek gas processing facility, with the remaining balance from draws on its credit facilities (~ $3B of liquidity). The draws will be repaid through the rising free cash flow of its asset base.

An accretive deal; raising estimates. ALA expects the acquisition to be immediately accretive to EPS (2022 guidance of $1.5-1.55B adj. EBITDA and $1.80-1.95 EPS maintained), with $0.10 plus accretion expected on a full-year run-rate basis. After updating our financial model for the acquisition, our 2022E EPS is now $1.91 vs. $1.86 (adj. EBITDA unchanged at $1,530M) and 2023 EPS is now $2.07 vs. $1.97 (adj. EBITDA also unchanged at $1,521M).