Keyera Corp T.KEY

RBC Initial Comments

[hawk35]

Initial comments.  Tomorrow RBC will disclose any changes to target price.


November 9, 2022
Keyera Corp.
 
Quick Take: Another cost increase for KAPS likely overshadows solid Q3/22 results
 
TSX: KEY | CAD 29.14 | Outperform | Price Target CAD 37.00
 
Sentiment: Negative
 
Our take
Despite Q3/22 results coming in ahead of our expectations and consensus, we believe the market will focus on there being another cost increase for KAPS, which we think will negatively impact investor sentiment.
 
Details
Results came in ahead of our expectations. In Q3/22, Adjusted EBITDA was $247 million compared to our forecast of $239 million and consensus of $239 million (12 estimates; range of $224-250 million). DCF/share was $0.73 compared to our forecast of $0.65 with the variance being primarily due to the modestly higher-than-forecast EBITDA and lower-than-expected cash taxes.
 
• Gathering and Processing: Q3/22 realized margin was $89 million compared to our forecast of $89 million.
• Liquids Infrastructure: Q3/22 realized margin was $101 million compared to our estimate of $96 million.
• Marketing: Q3/22 realized margin was $84 million compared to our forecast of $80 million.
 
KAPS costs increase again. The company now expects construction costs for the KAPS project to be $1.0 billion (net to KEY), which is up from the $0.9 billion guidance that was increased just last quarter. Keyera noted that it has spent $850 million so far on the project, and the remaining $150 million of spending has roughly 25% contingency built into that estimate. The company continues to target an end of Q1/23 in-service date for the project.
 
2022 guidance updated for growth capex. Due to the KAPS cost increase, Keyera now expects growth capex in 2022 to be $770-800 million (up from its prior guidance of $680-720 million). The company continues to guide to realized margin for the Marketing segment of $380-410 million (we were at $402 million heading into the quarterly release). Further, Keyera made no changes to its guidance for cash taxes ($55-65 million; we were at $58 million heading into the quarter) and maintenance capex ($100-120 million; we were at $110 million heading into the quarter).
 
Some disclosure for 2023 guidance released as part of the Q3/22 results. Keyera noted that it expects growth capex in 2023 to be $140-180 million (we were at $200 million heading into the quarterly release), which includes $50 million for KAPS as well as $45-55 million as a placeholder for the yet to be sanctioned Pipestone expansion. Also, the company expects cash taxes to be in a range of $10-25 million (we were at $32 million) with maintenance capex guidance being $75-85 million (we were at $60 million).

[Puma1back]

something confusing in the RBC update - they indicate that the possible sales value for the other half of KAPS is some $700 to $800 million - they do not identify the currency - and this is based on recent contracted infrastructure sales transactions. So how in h@ll's name do they reconcile that with a projected cost base for the other half to Keyera of some $1 billion. I know Keyera are the

[500wedge]

If they sell half of KAPS for that amount, its a huge winfall for Keyera. Recovering 70- 80% of the cash outlay and securing further thruput helps the bottom line.  Upgraded profit guidenance, albeit KAPS portion will be shared, also the added liquidity of the sale proceeds will guarantee a stock re-ratings. Patient investors will be rewarded here. Completation of KAPS also makes makes Keyera

[hawk35]

KAPS is still not live yet and they have contracted close to 70% of the capacity so KAPS will sell at a discount.  Post covid inflation and the feared recession is also discounting the sale price.  The market won't pay full price for an asset that is not fully contracted, not in production and facing economic headwinds of a recession. As for the sale, this is what Pembina and KKK

[Puma1back]

Very true comments but the discount imbedded in that RBC estimate is pretty extreme. Using mid-points, RBC is suggesting a realizable value of $750 million less the costs to finish of $100 million, netting to the sellor $650 million. this is 90% complete and under 6 months from operational - 35% discount to just the costing doesn't seem  realistic. The asset has an imbedded IRR of