Our view: Keyera remains one of our favourite midstream stocks given its ability to benefit from WCSB oil and gas volume growth in its existing footprint, potential capital expansion opportunities with attractive returns, and a “clean” financial profile, as it is free cash flow positive with a clean balance sheet (2.0x debt/EBITDA; covenant calculation) and a low payout ratio (61% of 2024E DCF).
Key points:
Business fundamentals remain strong. On the back of record G&P volumes in the North region in Q2/24, Keyera reiterated its expectation of delivering the high end of its 6–7% EBITDA CAGR target through 2025. This growth is underpinned by its view that gas prices will likely firm up as more meaningful LNG Canada-related volumes emerge over the coming year, and producer shut-ins are likely short-term in nature, as management anticipates that volumes may return in the early fall pending an AECO gas price recovery.
Looking to extend the 6–7% growth rate beyond 2025. Longer-term, Keyera expects the basin's volume growth to continue through the end of the decade, particularly in the Montney and Duvernay areas. Keyera is progressing a number of growth projects, and it anticipates providing an update in December on these initiatives, particularly a KFS de-bottleneck, a third fractionator, and/or a KAPS Zone 4 expansion. On the conference call, management highlighted the importance of underpinning these projects with long-term contracts where the take-or-pay volumes support its 10– 15% pre-tax target return on capital threshold, with upside from spot volumes, follow-on contracts, and/or marketing activities.
Solid balance sheet offers capital allocation flexibility. Keyera exited Q2/24 with an enviable 2.0x net debt/EBITDA (covenant calculation), which compares to its 2.5–3.0x target range. While reiterating its approach to equity self-fund its growth opportunities, Keyera highlighted its willingness to allocate capital to buy back its shares on an “opportunistic” basis.
Dividend increased by 4% and remains well-covered. Keyera increased its dividend to a new annualized rate of $2.08/share (from $2.00/share), which matched our forecast for both the timing and magnitude of the increase.
Raising estimates and price target (to $44.00 from $41.00). We increase our EBITDA estimates for 2024 and 2025 to $1.268 billion and $1.280 billion (from $1.250 billion and $1.252 billion), respectively. For DCF/share, our 2024 estimate is $3.40 (down from $3.46), driven by higher forecast maintenance capex, while our 2025 estimate is $3.73 (up from $3.62), reflecting higher forecast EBITDA. Mostly as a result of our higher 2025E EBITDA, raise our price target to $44.00/share, with no change to our valuation multiples and framework.