Our view: We believe Keyera's shares will continue to appeal to investors who want to capitalize on the theme of oil and gas production growth in the Western Canada Sedimentary Basin with a company that has a pristine balance sheet (debt/EBITDA of 2.2x based on the covenant calculation), a well-covered dividend (60% payout ratio), and above average EBITDA growth with minimal future capex (i.e., positive free cash flow generation).
Key points:
Significant leverage to growing WCSB oil and gas production. Keyera can benefit from growing natural gas and natural gas liquids (NGL) production given unutilized capacity: (1) at its Gathering & Processing assets, (2) on its pipelines, including KAPS; and (3) at its NGL fractionation and storage assets at KFS. Further, the company has exposure to future growth in WCSB oil production via its leading condensate footprint in the Edmonton-area, and its ability to deliver diluent into various systems feeding the oil sands. Of note, we expect WCSB oil production to annually grow to fill all Western Canadian pipeline export capacity by 2027 (please click here).
Sector leading financial setup. Keyera exited Q1/24 with debt/EBITDA of 2.2x (covenant calculation), while including the hybrids using 50% equity credit only adds about 0.5x to leverage. Payout ratio wise, we estimate a 60% payout ratio for 2024, which is inclusive of a forecast 4% increase in the dividend that we believe could be announced later this year.
Increased Marketing guidance. Following the conclusion of the NGL contracting season, Keyera expects realized margin in 2024 for the Marketing segment to range from $430-470 million (up from its "base" guidance of $310-350 million). Keyera's revised outlook reflects lower butane feedstock costs and continued strength in the iso-octane business. Given the increased Marketing profitability, Keyera now expects cash taxes to be in a range of $85-95 million (previously $45-55 million).
Better-than-expected results highlight the strength of the business. In Q1/24, adjusted EBITDA was $314 million compared to our forecast of $298 million and consensus of $295 million (11 estimates; range of $284 million to $300 million). Despite much higher-than-expected cash taxes, DCF/share was $0.90 compared to our estimate of $0.90 and consensus of $0.92 (eight estimates; range of $0.81 to $1.00).
Increased estimates drive our price target to $41.00 (up from $38.00).
Primarily reflecting a higher forecast for Marketing, we have increased our 2024 and 2025 EBITDA estimates to $1.250 billion and $1.252 billion, respectively (up from $1.157 billion and $1.189 billion, respectively), and our 2024 and 2025 DCF/share estimates are now $3.46 and $3.62, respectively (up from $3.21 and $3.37, respectively). Given the increase in our 2025E EBITDA, we have increased our price target to $41.00 with no change in our valuation framework.