Complete TDW Comments from Investor Day
Keyera Corp.
(KEY-T) C$31.33
2022 Investor Day Takeaways
Event
On March 29, 2022, Keyera Corp. (KEY) held its 2022 investor day; select takeaways are highlighted in this note.
Impact: SLIGHTLY POSITIVE
Capital Allocation: Within the 2022-2025 time period, KEY expects to generate a 6-7% CAGR in Adjusted EBITDA, mainly driven by contracted existing assets and secured projects that provide long-term take-or-pay revenue. In 2023, the company expects to reduce its net debt to adjusted EBITDA to its target range of 2.5x-3.0x and establish annual run rate for capital for growth projects of $300 million dollars starting in 2024. Management expects to balance these objectives with providing cash returns to shareholders.
KAPS: Guidance on 2022 growth capital spending net of capitalized interest has increased to $620mm-$660mm from $570mm-$610mm. Management noted that construction on KAPS is 65% complete and its new cost estimate for the project involves an increase of no more than 10% of its $800 million share in capital costs. The company has increased contracting for the project and continues to progress with discussions on securing additional commitments. Zones 1-3 of the project are sanctioned and management expects to contract the majority of volumes required to sanction Zone 4 later this year.
Marketing Guidance: KEY provided marketing guidance for 2022 to be in the range of $250 million-$280 million. Management also increased its annual 2023-2025 base guidance range for the segment to $250 million-$280 million from $180 million-$220 million.
Financial Forecasts Updated: We have updated our financial forecasts, largely to reflect higher marketing contribution and the increase in 2022 growth capital, and when combined with our updated outlook, results in our target price increasing by a dollar to $37.00.
TD Investment Conclusion
KEY's assets are well-positioned to serve WCSB production and provide optionality to access various high-value markets. The KAPS pipeline project should contribute to a more integrated service offering for KEY to effectively compete with. We see its resilient balance sheet and investment discipline as advantages in navigating a dynamic oil-and-gas industry environment and the transition to societies consuming lower carbon energy sources in the long term.
Details
KAPS: Management noted that construction on KAPS is 65% complete and its new cost estimate for the project involves an increase of no more than 10% of its $800 million share in capital costs. The company has sanctioned Zones 13 of the project, and management expects to contract the majority of volumes required to sanction Zone 4 later this year. Although KAPS integrates the company’s upstream G&P business and its downstream frac storage, logistics, and marketing operations, management noted that it does not need to purchase the remaining 50% interest in the project currently owned by Pembina Pipeline Corporation and KKR. Management communicated its flexibility on working with another partner on KAPS as well as the possibility of fully owning the project as long as the purchase is accretive to shareholders, meets the company’s investment criteria, and allows the company to satisfy its financial priorities.
Outlook
Energy Transition Strategy: Various energy-transition projects in the Industrial Heartland were highlighted during the investor day presentation, including initiatives to produce low-carbon products and the development of the first net-zero ethane cracker. Management also cited growth in the western Canadian basin stemming from projects such as the development of the lowest carbon LNG facility and foreign interest in developing low-carbon forms of energy. As KEY possesses a significant footprint in the Industrial Heartland, management acknowledged an opportunity unique to KEY, which involves leveraging its existing lands, infrastructure, and expertise to provide low-carbon solutions to customers in the industrial corridor between Edmonton and Fort Saskatchewan. KEY is well-positioned to play a meaningful role in energy transition as the company benefits from its proximity to large industrial players, optionality to add more cavern storage, infrastructure connectivity, and logistics and expertise. Management also sees potential to decarbonize its AEF and KFS facilities as well as offer a suite of services which could involve low-carbon feedstocks, hydrogen transportation and storage, and connectivity to carbon transportation and storage hubs.
Capital Allocation: Assuming flat marketing contribution in 2025 relative to 2022, KEY expects to generate a 67% CAGR in Adjusted EBITDA between 20222025, mainly driven by contracted existing assets and secured projects that provide long-term take-or[1]pay revenue. Although the company’s debt levels are expected to rise in 2022 as the AEF facility will go through a planned outage and KEY will focus on commissioning projects into service, the company will work towards reducing its net debt to adjusted EBITDA to its target range of 2.5x3.0x in 2023. In 2024, management will focus on establishing an annual investment run rate of $300 million for growth projects. KEY expects to balance these objectives with providing cash returns to shareholders. Management aims to maintain a self-funded model and noted that in the short term, it is unlikely to issue additional hybrid or preferred securities.
Marketing Guidance: KEY provided marketing guidance for 2022 to be in the range of $250 million$280 million. Annual 20232025 base guidance range for the segment has also increased to $250 million$280 million from $180 million$220 million. Based on YTD negotiations of NGL contracts for the contract year beginning April 1, 2022, KEY also provided three assumptions to support the guidance, including: 1) increased margins and reduced transportation costs at the AEF facility, driven by access to higher-value iso[1]octane markets; 2) higher commodity prices, including an assumption of WTI to range between US$65US$75 per barrel; and 3) contribution from U.S. assets recently placed into service. Management noted that it is confident of delivering its Marketing guidance even absent contributions from the Wildhorse and Galena Park operations.
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; 11) COVID-19; and 12) access to capital markets.