CIBC Top PickEQUITY RESEARCH
January 8, 2023 Earnings Revision
2023 Energy Infrastructure Outlook
Rolling Out 2024 Estimates, Revised Price Targets
Our Conclusion
Following a very strong 2021 on the reopening trade, 2022 was a flat year for our pipeline and midstream coverage list. The year started with promise as first half returns were solid, with geopolitical tensions highlighting the importance of energy security. This was followed by a weaker second half as inflation, interest rates and recession concerns were in focus, and company- specific issues emerged. We feel the current environment favors companies with manageable debt profiles and limited capex risk, providing capacity to grow dividends and/or repurchase shares. We see 2023 providing room for some positive return potential, especially if interest rate concerns moderate.
Fundamentals remain quite strong, with volumes exceeding pre-pandemic levels. While off their highs, commodity prices are solid, with inventory levels generally below five-year ranges, with the notable exception of propane.
Producers and OPEC+ continue to demonstrate market discipline. Although WCSB drilling activity continues to recover, we see more potential, especially if the Blueberry River First Nations issue (BRFN) is resolved. Overall, we see mid-single-digit increases in fee-based EBITDA being partly offset by moderating commodity income, resulting in EBITDA growth of over 3% in 2024. This should allow for dividend increases in the 3% range, supplemented by opportunistic share repurchases. We see potential for small, tuck-in M&A, with TC Energy the notable exception with its large asset sale program currently underway.
Valuations are generally still at a modest discount to historical averages, but this is likely appropriate given higher rates and the possibility of a recession. Dividend yield spreads have normalized from blowout levels in 2020.
The market has moved to a more balanced view on ESG issues in light of
energy security concerns; however, we expect the focus to shift more to
safety in 2023 in light of a number of recent events, including the release on the Keystone pipeline system. Continued progress on the energy transition should also be notable given a number of incentives, especially in the U.S. The main risk factors we see to our outlook are macro, notably rising interest rates, potential for a recession, and the progress of new COVID variants potentially impacting demand.
Key Points
Top Picks: Our preferred names include KEY for its ability to return cash to shareholders and a number of potential catalysts, and BIP for its inflation protection and visible growth based on 2022 acquisitions.
Price Target & Rating Changes: We've increased our price targets for BIP, ENB, PPL and TWM, while our price targets for LCFS and TRP decline slightly. There are no rating changes with this publication.
Brookfield Infrastructure Partners LP
We are increasing our price target to $46 (from $44) using a DCF model with a WACC of 6.79% and a 1.85% terminal growth rate.
• Upside Scenario: $53.00 (Previously $51.00). Assumes multiple expands to the median of PE firms at 16x 2024E FFO/u.
• Downside Scenario: $30.00 (Unchanged). Assumes a market-driven decrease in valuation multiple to 9x 2024E FFO/u.
• Key Risks To Our Price Target. Limited operational visibility, permitting and regulatory risk, inflation risk, volume risk, currency risk, access to capital, acquisition and competition