ATB Capital ATB Capital Markets analyst Nate Heywood thinks energy infrastructure companies are “well situated for the current environment.”
“Following recent years of volatility, we would point to the sectors stringent capital deployment, which featured balance sheet maintenance and demonstrated defensive cash flow profiles,” he said. “In the current economic environment, with higher interest rates and looming recession concerns, we expect energy infrastructure names will continue to take a defensive approach to capital allocation, limiting growth outside of underpinned contracted opportunities and returning capital shareholders.”
In a research report released Monday previewing 2023, Mr. Heywood predicted capital allocation will continue to be a focus of the sector this year.
“In regards to capex, we believe the inclination of a company to invest in growth projects provides confidence in the future trajectory given the historically stringent investment criteria employed; however, we expect that capital program flexibility could be valued in 2023 given the current interest rate environment,” he said. “Names like SPB, SES, KEY, and PPL boast some of the lowest capex as a percentage of EV. We would note that while ALA offers a higher percentage capex of EV, the majority of ALA’s investment boasts near-immediate returns given its focus on Utility assets.
“Turning to alternative capital allocation priorities, we expect dividend distributions and NCIB activity to remain a priority for names with light capital demands in 2023. Top yields in the space are seen in RNW, KEY, GEI, SPB, and SES. Looking to share buybacks in 2022, PPL, GEI and TA have repurchased the largest aggregate value of shares, but we would note SES made significant strides after initiating its NCIB on Dec. 14, 2022. In general, we expect NCIB activity will be largely opportunistic across our coverage universe for 2023 but will be evaluated against balance sheet health.”