TDW Full Commenets - Target Price 36.00Event
Keyera Corp. (KEY) reported Q3/22 AFFO/share of $0.73, above our estimate of $0.62 and Q3/21 AFFO/share of $0.68.
Impact: MIXED
Q3/22 Results: Results from all segments exceeded our expectations, with the biggest outperformance in the Gathering & Processing (G&P) business. Lower-than-forecasted maintenance spending also contributed to the beat. G&P benefited from higher throughput at the Wapiti, Pipestone, and Strachan gas plants, as well as higher sales volume in the ethane business at the Rimbey facility. Liquids Infrastructure results were driven by higher sales at a non-operated fractionation facility as the facility completed a maintenance turnaround during the third quarter in the previous year. The Marketing business continued to benefit from strong iso-octane margins and commodity prices, as well as higher liquids blending contribution.
2022 Guidance Mostly Unchanged: 2022E guidance ranges for Marketing ($380mm-$410mm) and maintenance capital ($100mm-$120mm) remain unchanged. 2022E growth capital has increased to $770mm-$800mm from $680mm-$720mm, driven by an upward revision in estimated costs to complete KAPS.
Model Updated: We have updated our model for the current quarter, and based on our updated outlook and revised valuations to reflect execution risk on large capital projects, our target price decreases two dollars to $36.00.
TD Investment Conclusion
KAPS' higher cost estimate this late in the construction process is a manifestation of the execution risk associated with constructing large linear infrastructure in the current inflationary environment, exacerbated by scarce labour and supply-chain disruptions. Once completed, the KAPS pipeline project should contribute to a more integrated service offering for KEY to effectively compete with, in our view. More broadly, we believe KEY's assets are well-positioned to serve WCSB production and provide optionality to access various high-value markets. We see KEY's solid balance sheet and incumbent franchise as advantages in navigating a dynamic oil & gas industry environment and transitioning to societies consuming lower-carbon energy sources in the long term.
Outlook
Marketing Update:
The Marketing guidance range for 2022 remains unchanged at $380mm-$410mm, and as a result, the cash tax guidance range is also unchanged at $55mm-$65mm. In 2023, the company is expecting higher utilization rates at AEF as a result of the six-week maintenance turnaround completed during the current year. Current pricing for RBOB and octane is higher than expected price levels in 2023, while pricing for commodities related to KEY's iso-octane and liquids blending business remains above historical averages. Butane pricing is currently trading lower than the forecasted level in 2023. Management communicated its preference to provide updated 2023 marketing guidance post Q1/23, after the completion of the 2023-2024 contracting season for butane.
Some 2023 Guidance Introduced: In 2023, KEY expects $140mm-$180mm of growth capital, with $50mm allocated to completing KAPS and $45mm-$55mm budgeted towards Pipestone expansion plans. Management also expects cash taxes of $10mm- $25mm and maintenance capex of $75mm-$85mm in 2023.
KAPS: At 90% complete and $850mm spent (net to KEY), KAPS remains on track for a Q1/23 in-service date, while costs have increased from the previously communicated estimate of $900mm to an estimate of $1.0bn, as a result of inflationary pressures and productivity losses arising from weather trends. On the company’s conference call, management cited positive fundamentals for the project, including strong balance sheet and inventory levels at the producer level, as well as strong basin growth. Management noted that KAPS provides a platform for future growth opportunities, which includes a potential fractionation expansion in Fort Saskatchewan, as well as KAPS Zone 4, which enables volume flow from NEBC Montney producers. FIDs for future opportunities are required to have strong contractual underpinnings and will be subject to KEY's return criteria. Despite cost increases for the project and excluding additional growth opportunities, management noted that KAPS remains in line with the company's return hurdle of 10-15% when fully contracted. Management communicated its preference to stay silent on the sale process of the remaining 50% of the project and noted that KEY will only pursue M&A opportunities that are a strategic fit for the company, provide accretion benefit to shareholders, and allow the company to remain within its balance sheet management guidelines.
Q4/22 Preview: We are forecasting Q4/22 AFFO/share of $0.69, below Q4/21 AFFO/share of $0.93. Our forecast is driven by planned outages and scheduled turnaround maintenance work at the Alberta EnviroFuels facility and the Pipestone gas plant, as well as timing of realized Marketing margins, partially offset by incremental growth in volumes at G&P.
Key Risks to Target Price
Key risks to our target price include 1) higher-than-expected bond yields; 2) acquisitions that do not create shareholder value; 3) operational disruptions; 4) commodity price risk; 5) unanticipated changes in environmental laws and regulations; 6) regulatory surprises; 7) WCSB risk; 8) economic dependence on key customers; 9) unfavourable regulatory decisions; 10) large-scale project execution risk; 11) COVID-19 impacts; and 12) access to capital markets.