National Bank Details National Bank Financial analyst Patrick Kenny thinks AltaGas Ltd.’s $650-milllion acquisition of natural-gas assets from Tidewater Midstream and Infrastructure Ltd. fortifies its Midstream platform, “strategically locking in supply for LPG exports.”
On Thursday, it announced an agreement for Tidewater’s Pipestone Gas Plant & Expansion Project as well as the Dimsdale Gas Storage Facility in a deal that includes $325-million in cash portion and $325-million in shares (approximately 12.5 million priced at $26.07 each).
“Expected to close in Q4, the Pipestone assets fit squarely into ALA’s Midstream strategy, adding approximately 15,000 barrels per day of highly contracted liquids handling capacity pro forma Pipestone II, translating into 6,500 bpd of propane/butane supply to be directed towards the company’s global exports platform by H2/25,” said Mr. Kenny. “Longer term, propane/butane supplies could move up to 11,500 bpd through processing additions beyond Pipestone II, representing10 per cent of its current global exports. Recall, ALA’s export terminals have capacity to export up to 150,000 bpd, while the proposed REEF expansion would take total export capacity above 200,000 bpd, with an FID expected in H1/24.”
Touting run-rate accretion and seeing its balance sheet “in check,” the analyst added: “With the deal contingent on Pipestone II reaching a positive FID, the all-in investment represents 5-per-cent accretion to our H2/25+ estimates, with run-rate D/EBITDA continuing to track the company’s long-term target of 4.5 times. Of note, the transaction also improves the company’s Midstream cash flow quality profile by increasing its contracted business mix by 6 per cent.”
Citing long-term accretion to his estimates, Mr. Kenny raised his target for AltaGas shares by $1 to $33, keeping an “outperform” recommendation. The average is currently $31.60.
“Combined with cash flow quality accretion (i.e., increased take-or-pay and fee-for-service) and a $35 sum-of-the-parts valuation based on current market comparables, we reiterate our Outperform rating alongside a 29.1-per-cent total return opportunity,” he said.
For Tidewater, the analyst came off research restriction with a target of $1.25, up from $1.10 but below the $1.38 average, with a “sectot perform” rating.
“Net of lease obligations also being offloaded, the total price tag represents an attractive transaction multiple of approximately 13 times 2023 estimated EBITDA,” said Mr. Kenny. “The deal is expected to close in Q4/23, with the ALA shares freely tradeable thereafter.”
“Of note, closing is subject to a positive FID on the 100 mmcf/d Pipestone Phase 2 Project, with a new JV agreement with ALA to finalize commercial underpinning before sanctioning. The JV agreement also permits both parties to collaborate on Pipestone II even if the transaction does not proceed.”