Fee-for-service Growth Our Conclusion
Strong quarterly results, a solid financial position, and new long-term
contracts for KAPS and KFS are positives for the stock. The newly added
contracts support the upper end of the targeted 6%-7% fee-for-service
EBITDA growth through 2025. Tight industry capacity should lead to future
opportunities. We reiterate our Neutral rating and increase our discounted
cash flow (DCF)-based price target to $36 from $35. The shares can
generate a low-risk dividend income for investors, with potential for further
capital appreciation as industry growth leads to new investment
opportunities.
Key Points
Marketing Outperformance: Marketing results came in at $129MM, ahead
of our estimate of $88.3MM (+45.6%) and consensus of $90MM (+43%) due
to strong iso-octane contributions. Full-year marketing results of $479MM
also exceeded the 2023 guidance of $420MM-$450MM. The company is
sticking to the $310MM-$350MM base marketing guidance for 2024, but
plans to update the marketing guide in May.
Results Beat: The company beat our estimates (adjusted EBITDA of
$339.2MM vs. our $289MM estimate and consensus of $291MM), with
strong contributions from Marketing and record contributions in Liquids
Infrastructure ($130.2MM vs. our $125.3MM estimate) and G&P ($116MM
vs. our $106.8MM estimate). DCF/share was $1.02 vs. our estimate of $0.94
and consensus of $0.92.
Solid Financials And Liquidity: Leverage is at 2.2x net debt to EBITDA,
below the low end of the company’s 2.5x-3.0x target range, but it follows a
strong marketing year. Management noted that with a base guidance
marketing contribution, leverage would have been 2.5x, within the target
range; and, with future projects on the horizon, the 2.5x-3.0x target range still
makes sense for the company. The company also has $1.05B of available
liquidity.
Other Updates: The Pipestone expansion was completed in Q4 ahead of
schedule and below budget at $58MM compared to expectations of $60MM-
$70MM. AEF is going offline in the spring for a turnaround ($35MM-$45MM
impact to 2024 marketing) without a capacity increase during this outage, but
it can operate above, or at 110% of, nameplate capacity.
The company announced long-term integrated agreements with several
producers, including a 30kbbl/d incremental commitment on KAPS and a
33kbbl/d incremental commitment at KFS (~50% renewals and 50% new
commitments). These are both long-term commitments, with weighted
average contract terms of 12 and 13 years, respectively, and 75% and 85%
take or pay, respectively.