CIBC comments on resultKEYERA CORPORATION
Q4/22 Results: Outlook Remains Strong; Bumping Price Target to $36
Our Conclusion While quarterly results missed consensus modestly, business developments and a solid big picture outlook keep us positive on the stock. The company hit all the guidance targets in 2022, the financials are in order, it has excellent exposure to key themes, and it should resume dividend growth in 2023 now that KAPS is substantially complete. All these cause us to remain constructive on the stock and we reiterate our Outperformer rating and bump our DCF-based price target to $36 from $35.
Key Points
Big Picture Remains Strong:
Given KAPS is substantially complete and the company’s strong financial position, we expect the company to resume dividend growth in 2023. While management did not provide a timeline for the increase, it noted that an increase is definitely on the horizon, either this year or next. The company also has excellent exposure to key themes including the Blueberry River First Nations (BRFN) resolution providing expansion opportunities and contracting strength on KAPS, energy transition opportunities, and the potential DOW ethylene cracker expansion. The company also remains the cheapest of the peer group at 10.1x 2024 EV/EBITDA. The company ends 2022 with 2.5x net debt to adjusted EBITDA, at the low end of the company’s leverage target.
Pipestone Expansion:
The company sanctioned a 40MMcf/d capacity expansion at the Pipestone gas plant, expected to cost $60MM - $70MM and supported by long-term take-or-pay agreements. Final regulatory approval is expected in March 2023 with a completion date scheduled for Q1/24. This is a key development of an important asset.
KAPS Update:
Line-Fill has started at KAPS which is now 99% completed. The budget was reaffirmed (at $1B) but start-up is now officially expected in Q2/23 vs Q1/23 previously (but consistent with our estimates).
Guidance Update:
2023 growth capital is now expected at $200MM- $240MM, up from $140MM-$180MM due to additional deferred KAPS spending from 2022. Maintenance capex for 2023 remains at $75MM - $85MM. We expect 2023 marketing segment guidance will be provided with Q1 results in early May, after the NGL contracting season.
Results Miss:
Reported results missed as adjusted EBITDA of $212MM ($4MM prior period adjustment) was ahead of our estimate of $205MM but below consensus of $218MM. DCF/share was $0.47, vs. our estimate of $0.51 and consensus of $0.55. Throughput remained strong, with G&P volumes 5.3% higher than our estimate and up 8% Y/Y. A non-cash impairment charge of $180MM was also recorded, mostly for the Simonette gas plant.
Company Profile Keyera is one of the largest midstream companies in Canada with assets in the gas gathering and processing and NGL midstream businesses and operations in Alberta, BC, and the U.S. The company is balancing its exposure to the marketing business by making investments into long duration assets such as KAPS.
Investment Thesis An increase in activity is growing throughput and Keyera's large, integrated platform lends itself well to organic growth projects. Medium-term opportunities to supply ethane infrastructure could also provide upside. Capital allocation toward highly contracted and integrated assets may result in multiple expansion over time.
Price Target
(Base Case): C$36.00 DCF model with a WACC of 7.38% and terminal multiple of 9.25x EBITDA
Upside Scenario: C$42.00 8% AFFO Yield in 2023
Downside Scenario: C$25.00 9x 2023 EV / EBITDA assuming market-driven multiple compression