RBC Increases target price from $29 to $33
May 12, 2021
Keyera Corp.
High octane Marketing outlook
Our view: We believe Keyera's shares are benefitting from an improved outlook, particularly for its Gathering & Processing and Marketing segments, with the Liquids Infrastructure business delivering the steady results that make it a "high multiple" collection of assets. Particularly for investors who are bullish on gas producer volumesin Keyera's South region, we see the shares as providing attractive upside optionality paired with downside protection in the form of below average debtleverage (2.7x using the covenant calculation) and a well-covered dividend.
Key points:
Revised Marketing guidance well-above our forecast; we think the long[1]term "base" guidance is likely to shift higher. Keyera provided guidance for realized Marketing margin in 2021 of $260-290 million (our estimate heading into the quarter was $234 million). The company noted the year-to-date performance as well as lower butane supply costs following negotiations for NGL supply agreements for the new contract year (i.e., beginning on April 1, 2021) as being drivers behind 2021 guidance being higher than the company's "base realized margin" guidance range of $180-220 million for Marketing. Of note, Keyera stated that partly due to the new Wildhorse and Galena Park projects, it will evaluate its "base realized margin" range, likely at the end of the year, and we see the potential for a revised range of $200-250 million. Although Marketing results can be volatile, we believe the increased near-term cash flow is valuable to help fund the multi-year construction of KAPS.
KAPS: a bit more disclosure on returns and contracting. Keyera stated that its expected 10-15% return on invested capital for KAPS is on a stand alone basis (i.e., it does not include upstream or downstream benefits). Further, the guidance does not appear to depend on volumes from B.C., whether that be from the proposed third-party Northeast B.C. Connector project or another initiative.
Q1/21 results were in line with our street high EBITDA forecast. Adjusted EBITDA in Q1/21 was $225 million versus our forecast of $226 million and consensus of $216 million (12 estimates; range of $210-226 million). DCF/ share in Q1/21 was $0.75 versus our forecast of $0.73 with the variance partly due to lower-than-expected maintenance capex (quarterly timing that should reverse in future quarters based on guidance).
Increasing our estimates primarily to reflect a more favourable Marketing outlook. Our new 2021 and 2022 DCF/share estimates are $3.03 and $2.88,respectively (up from $2.80 and $2.77,respectively) with our EBITDA forecast increasing to $938 million and $986 million, respectively (up from $889 million and $968 million, respectively).
Valuation: increased EBITDA outlook primarily drives our new $33.00 price target (up from $29.00). Our new price target is due to our revised 2022E EBITDA as well as factoring in upside from filling the Wapiti plant while maintaining a blended 10.5x EV/EBITDA valuation.
Guidance: Marketing surprises to the upside
Keyera provided guidance for its 2021 Marketing margin that we think was above street expectations, and with new projects entering into service, we think the company could revisit its “base realized margin” guidance later this year with a resulting upward revision.
· Revised Marketing guidance for 2021 well-above our forecast. Keyera provided guidance for realized Marketing margin in 2021 of $260-290 million, which we think was higher than most investors had been expecting (our estimate heading into the quarter was $234 million). The company noted the year-to-date performance as well as lower butane supply costs following negotiations for NGL supply agreements for the new contract year (i.e., beginning on April 1, 2021) as drivers behind 2021 guidance being higher than the company's "base realized margin" guidance range for Marketing of $180-220 million. The company further noted that its $260-290 million guidance is based on “weaker iso-octane premiums compared to a typical peak demand season”, and “current forward pricing for any unhedged volumes for the remainder of 2021.” Please see Exhibit 1 for an updated look at the RBOB-butane spread, which has widened significantly year-over-year.
· Colonial pipeline disruption could create opportunities. We note that Keyera is positioned to capture upside from any related market dislocations. Please click here to read RBC’s Oil Strategy team’s thoughts on the Colonial pipeline outage.
· We think it is likely that Keyera will increase its "base realized margin" guidance range. Currently, Keyera highlights a "base realized margin" range for Marketing of $180-220 million, which we believe is a conservative estimate of what that segment could produce in most years (i.e., more upside than downside). With new projects entering into service, namely Wildhorse and the Galena Park blending assets, Keyera stated that it will evaluate that range, likely at the end of the year. Conservatively, we believe the company could increase its "base realized margin" guidance to a range of $200-250 million.
· Maintenance capital guidance increased. The company also updated its maintenance capital budget for the year to $30-40 million (up from $25-35 million). The increase to the budget is to accommodate additional work being undertaken at the Alberta EnviroFuels (AEF) facility.
Other updates from the quarter:
Management provided several other updates as part of its disclosures around the quarter, with key takeaways as follows:
· Positive commentary on producer volumes with an encouraging read through for Gathering and Processing volumes. At a high level, management noted that it is “encouraged to see the increase in drilling activity and volumes” from its customers. Specifically, in the company’s North region, Keyera is seeing new production volumes as stronger condensate prices resulted in higher producer activity, while in its South region, “volumes have stabilized”, and the company is seeing the potential for volume growth from financially stronger producers who are focused on increasing drilling activity. Taken together, Keyera highlighted “the early indications of a positive financial rebound for the Gathering and Processing business in 2021 relative to 2020”.
· KAPS: Additional commentary on contracting; project is set to move into the construction phase. Keyera stated that its expected 10-15% return on invested capital for KAPS is on a stand-alone basis (i.e., it does not include upstream or downstream benefits), and includes additional contracts that it is confident it will be able to secure. Further, the guidance does not appear to depend on volumes from B.C., which would be dependent on the construction of a third-party pipeline. KAPS is set to move into construction this summer, following the company’s announcement that it would move forward with the project in March (please click here for additional information) with the company expecting a completion date of 2023. Pipe fabrication commenced in Q1/21 and Keyera also noted the clearing of 146 kilometres of right-of-way.
· Balance sheet remains in good shape as KAPS construction begins. Keyera ended the quarter with debt/EBITDA of 2.7x (a covenant calculation that excludes the company’s subordinated hybrid notes), which compares to its target range of 2.5-3.0x (please see additional information in Exhibit 2). Given its relatively low debt leverage, we think Keyera is in a solid position to fund the KAPS pipeline.
Marketing drives our estimates higher :
We have increased our 2021 and 2022 DCF/share estimates to $3.03 and $2.88, respectively (up from $2.80 and $2.77, respectively), with our 2021 and 2022 EBITDA forecasts increasing to $938 million and $986 million, respectively (up from $889 million and $968 million, respectively). The primary driver of the increase to our estimates is stronger expected contribution from Marketing, as discussed on page 2 of this report, with our 2021 and 2022 realized margin forecasts increasing by approximately $50 million and $20 million, respectively. Partial offsets to the higher anticipated Marketing margin include the loss of contribution from oil and gas production (Keyera sold its ownership interest in materially all of its remaining production in Q1/21) and on a DCF basis, higher interest expense due to the issuance of the subordinated hybrid notes in March, as well as the increased maintenance capex guidance for 2021. Of note, while we have not changed our maintenance capex forecast for 2022, the significant forecast increase from 2021 is due to an assumed major turnaround at AEF.