cibc analyst: Target (12-18 mos.): C$34.00 OutperformerQ1/23 Results: Solid Beat; Optimistic For The Future
Our Conclusion
A strong quarter, strengthening volume trends, and reduced risks from more VLGCs and a strong hedge book keep us positive on the stock. The company is also advancing additional growth opportunities through the agreement with Vopak. We continue to treat Mountain Valley Pipeline as optionality which could provide a material catalyst for deleveraging, despite recent regulatory setbacks. We reiterate our Outperformer rating and maintain our DCF-based price target at $34.
Key Points
Results A Solid Beat: Reported results beat our estimates (+6.6%) and consensus (+6.7%). Normalized EBITDA of $582MM beat our estimate of $546MM and consensus of $545MM. Reported results included $14MM for debt defeasance on the sale of the Alaska utilities and an undisclosed contribution for settling previously disclosed contingencies related to PetroGas. Reported results include normalized diluted EPS of $0.98 that beat our estimate of $0.93 and consensus of $0.89. The company maintained 2023 guidance, including EBITDA at $1.5B-$1.6B and EPS of $1.85-$2.05. The CEO search remains on track for completion in H1/23.
Positive Business Developments: The company formalized a 50/50 JV with Royal Vopak ("Vopak") to evaluate the development of the previously disclosed Ridley Island Energy Export facility (“REEF”), a large-scale LPG and bulk liquids terminal and marine infrastructure on Ridley Island. This has not yet reached FID, but has been granted key permits for the first phase.
Big Beat In Midstream, And Future Export Spreads Are Constructive: The segment reported EBITDA of $183MM, above our $151MM estimate (+21.6%), based on strong frac volumes and NGL export spreads. Strong LPG export volumes of 99,444 Bbl/d beat our 98,000 Bbl/d estimate. The outlook mentioned that export spreads are more constructive for 2023 and 2024 strip pricing. The company has also signed a new seven-year time charter for a VLGC ship in 1H26. This is longer-dated, but freight has been a big cost item, and this move reduces risk and increases visibility over the long term. This is in addition to two VLGCs the company is taking on in late 2023 and early 2024.
Utilities In Line: Segment EBITDA came in at $401MM, slightly outperforming our $394MM estimate, reflecting good cost performance, and a favorable foreign exchange offsetting warmer-than-expected weather.
New Ridley Island Energy Export (REEF) Project
With the Alaskan Utility sale closed, and leverage lowered using proceeds from the sale, the company has now turned to adding future business development opportunities and additional de-risking initiatives. The Ridley Island Energy Export facility (“REEF”) project is the most material project. While capital hasn’t been disclosed, we could envision a project nearing $1B on a 100% basis. Previously led by Vopak, regulatory filings include an estimated capital cost of $885MM for all phases, but we consider these stale and prior to recent inflationary cost pressures. More clarity on capital is expected later this year following a FEED study prior to FID. The project is expected to be done in phases with the first phase focusing on propane exports with future phases adding on other fuels. The first phase also includes in-water work for a new jetty. While this has been in the long-term plan for a while, funding might become a question for investors. Considering a three-year build period, the company’s net share becomes manageable, but failing new asset sales may require some deceleration on capital spending in the utility segment to manage leverage metrics. Management expects a multiple of roughly 6x–8x EBITDA. On contracting, the company expects a number of firm, multi-year commitments to back the project. Currently on an aggregate basis, 40% of the RIPET is tolled, with the longer-term expectation for 40%–60% of all volumes to be tolled in aggregate. We see this as achievable given the increased demand the company is seeing.
Other De-Risking Opportunities
Export spreads and volumes also continue to strengthen, and the 2023/2024 outlook for NGLs is looking strong after the recent NGL contracting season. Frac-exposed volumes also remain well hedged, allowing the company to realize higher rates. The company has also begun to layer some hedges into Q4 and management likes where the propane curve is right now, and expects higher rates during Q2. The company is also taking steps to reduce volatility within the export business. Ocean freight costs will be less volatile as it receives two new VLGC ships in late 2023 and early 2024. With the quarterly report the company disclosed it has added a third VLGC with an agreement for a seven-year time charter beginning in 2026, further helping to increase earnings visibility by reducing cost risk. Each new VLGC reduces maritime shipping costs by ~25% relative to current Baltic freight forward pricing, and lowers pricing volatility on a longterm basis. If we have one area of concern it is with the Mountain Valley Pipeline (MVP), which saw another setback in early April. The U.S. Court of Appeals vacated the previously approved West Virginia Clean Water Act certification for the Mountain Valley Pipeline (MVP). Now, more extensive permitting work will be required. Neither the completion nor sale of the MVP is in our ALA valuation, but was seen by the market as the next biggest deleveraging opportunity if it were finished this year.
Price Target Calculation
We are maintaining our price target at $34 using a DCF model with a WACC of 7.00% and a terminal multiple of 11.00x