Post by
hawk35 on May 10, 2023 11:35am
TD Waterhouse Increases Target Price to $37.00
Keyera Corp.
(KEY-T) C$32.10
Q1/23 Results
Event
Keyera Corp. (KEY) reported Q1/23 AFFO/share of $0.99, above our estimate of $0.78, the recent consensus estimate of $0.79 and Q1/22 AFFO/share of $0.81.
Recommendation: BUY
Risk: MEDIUM
12-Month Target Price: C$37.00 Prior: C$36.00
12-Month Dividend (Est.): C$1.92
12-Month Total Return: 21.2%
Impact: SLIGHTLY POSITIVE
Q1/23 Strong Across the Board: Results from all segments exceeded our expectations, with the biggest outperformance in the Marketing business. G&P benefited from higher operating margin from the Wapiti and Pipestone gas plants, while Liquid Infrastructure results were driven by higher frac fees and incremental contribution from the acquired 21% working interest in KFS, as well as higher rail loading volumes and sales from the Alberta Diluent Terminal. Marketing performance benefited from higher iso-octane margins and commodity pricing as well as strong condensate demand.
KAPS Construction Complete: Construction on KAPS is complete and costs are within the latest $1bn net cost estimate. The condensate line on KAPS transported its first product in April 2023 while the NGL line is scheduled to flow product beginning in June 2023. In our view, KAPS enables KEY the ability to provide an integrated service offering, making KEY more competitive, which we think is positive.
Marketing 2023 Guidance Introduced: The 2023 Marketing guidance range of $330-370mm is above the base $250-280mm guidance through 2025, driven by lower butane feedstock costs and strength of iso-octane premiums which benefits KEY’s iso-octane business. 2023 guidance for cash tax expense ($nil), maintenance capital ($75-85mm) and growth capital ($200-240mm) remains unchanged.
Financial Forecasts Updated: We have updated our financial forecasts to reflect the Q1/23 results and updated outlook, and our target price increases a dollar to $37.00.
TD Investment Conclusion
KEY's first quarter results position the company well for 2023, and we expect the growing contribution from KAPS will position the company to resume growing the dividend next year. We believe KEY's assets are well-positioned to serve WCSB production and provide optionality to access various high-value markets, with the completion of KAPS augmenting the company's suite of midstream services and enabling a more integrated offering to producer customers. We see KEY's solid balance sheet and incumbent franchise as advantages in navigating a dynamic oil[1]and-gas industry environment and transitioning to societies consuming lower-carbon energy sources in the long term.
Outlook
Capital allocation: With the construction on KAPS completed, management will focus on preserving KEY's strong balance sheet, followed by long-term dividend growth, while business reinvestment and opportunistic share repurchases will compete for any remaining excess cash flow. Management expects that the investments made in establishing a presence in the Montney region and in developing connectivity of core Liquids Infrastructure assets will allow fee-for-service cash flows to support the annual adjusted EBITDA CAGR of 6-7% through 2025. KEY noted that its current organic growth backlog contains smaller projects relative to KAPS as KEY expects stronger returns on smaller projects. Going forward, annual capital expenditures are generally expected to range between $300-400mm and allow KEY to remain within its targeted 2.5-3.0x net debt/adjusted EBITDA range. Management continues to monitor the market for acquisition opportunities that are strategic and value accretive, as well as allow KEY to remain within its target debt parameters
KAPS Construction Complete: Construction on KAPS is complete and costs are within the latest $1bn net-cost estimate. The condensate line on KAPS transported its first product in April 2023 while the NGL line is scheduled to flow product beginning in June 2023. In our view, KAPS enables KEY the ability to provide an integrated service offering, making KEY more competitive, which we think is positive. On the conference call, management highlighted the operational risk of relying on one method of transportation and KAPS provides optionality to customers. KAPS is expected to benefit from NGTL expansions into the U.S., growing basin volumes, and rising global LNG exports demand. Management noted that contracting discussions are progressing positively and continued strength in the NEBC region, the introduction of Canada LNG, and recent Indigenous developments are supportive for contracting KAPS. Management highlighted their ability to leverage their acquired fractionation capacity in discussions for full path solutions for producers. While sanctioning decisions for the "Zone 4" expansion will be assessed on a stand-alone basis, management noted that they are focused on increasing contractedness of Zones 1-3.
Marketing 2023 Guidance Introduced: The 2023 Marketing guidance range of $330-370mm is above the base $250-280mm guidance through 2025, driven by lower butane feedstock costs and strength of iso-octane premiums, which benefit KEY’s iso-octane business. KEY noted that the Marketing business benefitted from storage ownership obtained from the acquisition of an additional 21% ownership interest in KFS. Management highlighted that KEY has exceeded its base $250- 280mm Marketing guidance for the last several years with the past five-year average at ~$340mm. KEY expects KAPS to enhance earnings from the Marketing segment in the long-term and would revise base guidance when appropriate.
Alberta Wildfires: As a precautionary measure to the unfortunate wildfires across Central and Northern Alberta, KEY had shut down six of its natural-gas processing plants late last week, with Wapiti in the process of being restarted. Management does not expect any material financial impact from the wildfires. We do not currently expect the wildfires to have any financial material impact to our coverage universe, as midstream facilities are designed to withstand adverse events, including wildfires, and we expect shutdowns to not last long.
Q2/23 Preview: We are forecasting Q2/23 AFFO/share of $0.87, below Q2/22 AFFO/share of $0.94. Our forecast is driven by softer realized commodity fundamentals and pricing along with facility outages, partially offset by incremental growth in volumes at G&P, a higher ownership interest in KFS, and incremental growing contributions from KAPS.
Key Risks to Target Price
Key risks to 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) surprise industry regulation; 7) WCSB risk; 8) economic dependence on key customers; 9) unfavourable regulatory decisions; 10) large-scale project execution risk; and 11) access to capital markets