From todays Globe and Mail After Pembina Pipeline Corp. (PPL-T +1.52%increase) sold its 50-per-cent ownership in the Key Access Pipeline System (KAPS) for less than he anticipated, Raymond James analyst Michael Shaw lowered his recommendation for Keyera Corp. (KEY-T +0.33%increase), which holds the remaining stake, to “outperform” from “strong buy” previously.
On Monday before the bell, Pembina announced the deal with private equity firm Stonepeak Partners for $662.5-million, less an approximate $50-million adjustment for the cost to complete the pipeline that would have fallen to it.
“We had expected the PPL/KKR share of the pipeline would fetch more than $700 -million (without the cost adjustment) implying a valuation multiple of 10 times on run rate EBITDA,” he said. “The lower valuation likely reflects some combination of the uncertainty of future cash flow execrations from the pipeline and compressed infrastructure multiples due to higher interest rates.”
Mr. Shaw does think the valuation for KAPS will “ultimately look very attractive,” adding: “KAPS has contended with a difficult pipeline construction market in 2022 – inflation and labour competition from other major pipeline projects – resulting in a series of cost overruns that have hurt the return outlook. Nonetheless, the fundamental outlook for the pipeline has improved considerably through 2022. Natural gas liquids volumes from the Alberta Montney have grown steadily this year. We expect KAPS will be well positioned to capture incremental production volumes from a growing market, improving the economics of the pipeline, excluding options to bolt on lower cost growth phases.”
His target for Keyera shares remains $32. The average is $33.43.
“We are introducing our 2024 estimates for Keyera and are moving our rating to Outperform,” he said. “We expect core infrastructure EBITDA to grow by 6 per cent year-over-year in 2024. Infrastructure growth is ffset by a lower contribution from the marketing segment as we move to the mid-point of KEY’s long-term marketing guidance from a relatively strong marketing environment in 2022 and 2023.Keyera is trading at 10.2 times our 2023 and 9.8 times our 2024 EBITDA – at the lower end of its 10.1-times to 10.5-times range since 2019 (excluding 2020 Covid lows). We are lowering our raring to Outperform to reflect the forward multiples moving towards KEY’s recent trading ranges.”