September 1, 2023
AltaGas Ltd.
Delivers a strategic and accretive acquisition
Our view: We positively view the strategic and accretive transaction that we believe provides multiple benefits, including: (1) guidance for the base operating assets providing modest EPS accretion; (2) strong growth from the Pipestone expansion that AltaGas expects to result in the acquired assets generating about 5% EPS accretion in 2025; (3) a modest reduction in debt/EBITDA by roughly 0.1x; and (4) an improved risk profile with the acquired assets resulting in pro forma EBITDA coming from take-or-pay/ fee-for-service contracts increasing by 6% (with a commensurate reduction in the percentage of EBITDA coming from commodity-exposed activities).
Key points:
Strategic acquisition of Pipestone gas processing and Dimsdale gas storage. AltaGas announced an agreement to acquire the Pipestone natural gas plant (including the expansion project), the Dimsdale natural gas storage facility, and infrastructure associated with those assets from Tidewater Midstream (TSX: TWM; $1.08; Outperform, Speculative Risk) for $650 million. The consideration paid will consist of $325 million in cash and $325 million in common stock of AltaGas (approximately 12.5 million shares priced at $26.07/share). The company expects the transaction to close by the end of 2023.
Forecast for immediate EPS acccretion that grows over time. AltaGas expects “modest” EPS accretion in 2024 (we estimate roughly 1% accretion), and accretion of approximately 5% in 2025 once the Pipestone expansion is complete. For 2024, our revised forecast results in a modest increase in EPS to $2.11 (up from $2.09) driven by EBITDA from the acquired assets less depreciation, interest expense (net of capitalized interest associated with the Pipestone expansion) and income tax expense.
Modest reduction in leverage; AltaGas stated that reducing leverage is a "top corporate priority". With the common shares being issued to Tidewater Midstream as part of the transaction, AltaGas expects the acquisition to result in a 0.1x reduction in debt/EBITDA in 2025+.
Reducing overall risk. We believe the transaction reduces risk in a number of different ways, including: (1) adding to the midstream contracted profile weighted average contracting of 8.5 years; (2) improving AltaGas’ access to propane and butane volumes for its global LPG exports business; and (3) increasing the proportion of EBITDA coming from take-or-pay/fee-for- service activities by about 6% with a commensurate reduction in EBITDA being derived from commodity-exposed activities.
Price target increased to $32.00 (up from $31.00). The accretive acquisition has a positive impact on our sum-of-the-parts valuation with a new range of $30-34/share (previously $29-33/share). The modestly higher sum-of-the-parts valuation range underpins the increase in our price target.