Post by
hawk35 on Nov 09, 2023 11:09am
RBC Comments
November 8, 2023
Keyera Corp.
An enviable setup
Target Price $38.00
Our view: Largely based on the ramp-up of contractual revenue driven by KAPS, we believe Keyera can deliver a 6–7% EBITDA CAGR (2022–25E) from its fee-for-service business while keeping debt/EBITDA in the 2.5x range and generating free cash flow that could be allocated to returns of capital (e.g., share buyback, dividend growth) and/or funding new growth without requiring additional debt. We expect to hear more about Keyera’s capital allocation plans when it provides an update on the business, including its 2024 guidance, in December.
Key points:
Marketing segment guidance increased for 2023. Keyera stated that it is “on track for a record year for realized margins from [its] Marketing business,” and with that the company increased its guidance for realized Marketing margins in 2023 to $420–450 million (from $380–410 million). The company cited continued strength in iso-octane and gasoline premiums and high utilization rates at the AEF plant as being drivers behind the increased Marketing guidance for 2023.
Growth capex trending lower due to Pipestone expansion capex coming in at the low end of Keyera’s budget. The company now expects growth capex in 2023 to be $200–220 million (down from $200–240 million). The primary driver behind the reduction is Keyera’s expectation that capex for its Pipestone gas plant expansion will come in at the low end of its original $60–70 million cost estimate range, and we also note that Keyera expects the plant to come into service slightly ahead of schedule (i.e., operational by the end of 2023 versus in Q1/24).
Guidance for 2024 to be provided in December, which we believe may also include an increase in the “base” Marketing guidance. Keyera noted that it will provide guidance for 2024 along with a general business update in December, which will include an update on the base Marketing guidance that we believe could be increased from the prior base realized margin range of $250–280 million. That said, Keyera noted that Marketing guidance for 2024 will be provided at its “usual” timing, which is concurrent with the release of Q1 results to capture the NGL contracting year that runs from April to March.
Bumping up our 2023 and 2024 estimates; rolling out our 2025 forecast. Our new 2023 and 2024 DCF/share estimates are $3.48 and $3.37 (up from $3.34 and $3.35), respectively; the changes are largely driven by higher forecast Liquids Infrastructure and Marketing EBITDA, partly offset by higher interest expense. We introduce our 2025 estimates, which include DCF/share of $3.40, with growth from 2024 largely driven by a ramp-up in EBITDA from the KAPS project being offset by an assumption of higher cash taxes as we anticipate a moderation in capital spending.
Positive messaging heading into the guidance/update in December
· Marketing segment guidance increased for 2023. Keyera stated that it is “on track for a record year for realized margins from [its] Marketing business,” and with that the company increased its guidance for realized Marketing margins in 2023 to $420–450 million (from $380–410 million). The company cited continued strength in iso-octane and gasoline premiums and high utilization rates at the AEF plant as being drivers behind the increased Marketing guidance for 2023.
· Growth capex trending lower due to Pipestone expansion capex coming in at the low end of Keyera’s budget. The company now expects growth capex in 2023 to be $200–220 million (down from $200–240 million). The primary driver behind the reduction is Keyera's expectation that capex for its Pipestone gas plant expansion will come in at the low end of its original $60–70 million cost estimate range, and we also note that Keyera expects the plant to come into service slightly ahead of schedule (i.e., operational by the end of 2023 versus in Q1/24).
o No change in maintenance capex or cash tax guidance for 2023. Keyera continues to expect
maintenance capex in 2023 to be $95–105 million with no cash taxes paid in 2023.
· Guidance for 2024 to be provided in December. Keyera noted that it will provide guidance for 2024 along with a general business update in December, which will include an update on the base Marketing guidance that we believe could be increased from the prior base realized margin range of $250–280 million. That said, Keyera noted that 2024 Marketing guidance will be provided at its “usual” timing, which is concurrent with the release of Q1 results to capture the NGL contracting year that runs from April to March.
· Maintaining a strong balance sheet is Keyera’s top priority. The company highlighted that it exited Q3/23 with debt/EBITDA of 2.5x (covenant calculation), which is at the low end of its 2.5–3.0x range. We expect to hear more about Keyera’s capital allocation plans when it provides an update on the business in December; however, we expect the company to favour the deployment of capital into new growth initiatives versus committing to a material share buyback.
Q3/23 results modestly ahead of our expectations
In Q3/23, adjusted EBITDA was $288 million compared to our forecast of $279 million and consensus of $275 million (nine estimates; range of $253–286 million). DCF/share was $0.81 compared to our estimate of $0.76 and consensus of $0.79 (eight estimates; range of $0.69– 0.85).
· Gathering and Processing: Q3/23 realized margin was $94 million compared to our estimate of $93 million.
· Liquids Infrastructure: Realized margin in Q3/23 was $128 million versus our forecast of $118 million. Of note, Keyera highlighted that KAPS outperformed its expectations, with customers delivering higher volumes than the company anticipated.
· Marketing: Q3/23 realized margin was $100 million compared to our estimate of $97 million.
· G&A and Other: Costs during the quarter were ($34) million versus our forecast of ($29) million.
Valuation
Our $38.00/share price target is based on applying an 11.0– 11.5x EV/EBITDA valuation to our forward 2025E EBITDA. Our target multiple is consistent with a blended contribution from Gathering & Processing (at 11.5x EBITDA), Liquids Infrastructure (at 12.5x EBITDA), and Marketing (at 8.5x EBITDA). The risk-adjusted expected total return to our price target supports our Outperform rating for the shares.
Upside scenario
Our upside scenario of $43.00 is based on a 1x increase in EV/EBITDA valuations, which would bring the valuation close to the average valuation for midstream stocks over the past 10 years leading into the onset of COVID. This scenario also includes roughly $3/share associated with upside from volumes at new facilities and the development of spare land in Fort Saskatchewan.
Downside scenario
Our downside scenario of $23.00 per share is based on a scenario where Marketing results are at the low end of the long-term “base realized margin” range and Gathering & Processing margins are similar to 2020 levels (i.e., cyclical trough).
Investment summary
We expect Keyera’s shares to outperform the peer group for the following key reasons:
• Poised to benefit from improving basin trends. We believe that Keyera remains poised to benefit from increased WCSB volumes and demand for midstream infrastructure, at its existing facilities as well as a rising tide of future demand driving additional contracting for KAPS. On top of the potential for improved throughput and fee-driven revenue, we also see the potential for Keyera to add long-term contracts, which could help lock in future cash flows and reduce future volatility.
• Attractive financial setup. With KAPS largely complete, Keyera appears set to be free cash flow positive. Further, the company has an attractive leverage profile, ending Q3/23 with net debt/EBITDA of 2.5x, which is at the low end of its targeted 2.5–3.0x net debt/EBITDA range (credit facility calculation). We expect that the payout ratio will continue to be at or below 70% through 2024. Further, the company intends to finance its growth capex on an equity self-funded basis (i.e., no DRIP, ATM, or discrete equity).
• Potential catalysts. Additional contracts for KAPS; Marketing results that support the company’s guidance; and new projects underpinned by long-term, take-or-pay contracts that can be financed on an equity self-funded basis.
Risks to rating and price target
Low spreads and fewer opportunities in the marketing business; a material reduction in throughput at the company’s gathering and processing facilities; ineffective hedges; and new projects, investments and/or acquisitions that fail to gain investor confidence