Raymond James Adjusts TPs in the Space Raymond James analyst Michael Shaw thinks a supportive macro environment in the energy sector is setting up the pipeline and midstream group for a “strong” first-quarter earnings season.
“While energy infrastructure companies, by design, have limited exposure to commodity prices, they will indirectly benefit from the move higher in energy prices as production volumes and asset utilization creep up,” he said. “This will support EBITDA generation and ‘return-on’ metrics from existing assets while also increasing the demand for new capacity. Furthermore, we expect that the pace of project sanctioning will not strain balance sheets.
“While the higher commodity prices have yet to entice producers to abandon their capital disciplines - at least en masse - there has been a clear response in production volumes. Canadian production – both gas and liquids – are testing recent production highs. Wellhead gas production has moved above 17 bcf/d for the first time since 2014 and condensate production reached an all-time high. The increase in volumes will push the utilization of existing midstream and pipeline assets, which should be supportive of 1Q results.”
Mr. Shaw thinks higher volumes are likely to lead to new project sanctioning in 2022, largely in the second half of the year. However, he thinks companies will not “return to meaningfully outspending cash flows - limiting the strain on balance sheets.”
Believing the strong macro conditions and growth outlooks are largely reflected in valuations already, he made a series of target price increases:
- Enbridge Inc. (ENB-T, “market perform”) to $58.50 from $54.50. Average: $57.58.
- Gibson Energy Inc. (
, “outperform” to $26.50 from $26. Average: $25.50. - Keyera Corp. (KEY-T, “outperform”) to $36.50 from $34. Average: $35.50.
- Pembina Pipeline Corp. (
, “market perform”) to $49.50 from $45.50. Average: $48.83. - TC Energy Corp. (TRP-T, “outperform”) to $73 from $67.50. Average: $70.47.
“Our top pick in the midstream group, and our Top Pick for 2022, remains Keyera,” said Mr. Shaw. “Keyera recently hosted a positive investor day and has since been closing its valuation gap (see our post investor day note here). As its investor day just a few weeks ago, we do not expect a meaningful update or any operational surprises from the 1Q results. In our view, Keyera’s 2023 valuation still does not reflect the growth from the completion of the KAPS pipeline. With concerns around KAPS cost inflation and the outlook for the marketing segment addressed at the investor day, we expect KEY will continue to outperform.”