Following the close of its US$900-million hybrid note offering, AltaGas Ltd.’s (ALA-T) leverage position has “materially” improved, according to ATB Capital Markets analyst Nate Heywood.
“The proceeds will be used to repay current indebtedness under the credit facility (approximately $673-million as of Q2/24) and for repaying senior notes,” he said in a research report released Tuesday. “ALA has two notable maturities for an aggregate $800-million due in H1/25 ($300-million in January and $500-million in June).
“The hybrid offering significantly improves the calculated leverage position as ALA’s 4.5 times leverage target excludes hybrid notes. As a result, we are now forecasting a year-end 2024 estimated multiple of 4.3 times (excluding hybrids) compared to 5.0 times previously. For comparability with peers and a 50-per-cent inclusion of hybrid notes in the calculation, we see leverage sitting near 4.8 times at YE2024. Leverage could further be improved with non-core asset sales, and we would note management previously initiated a formal sales process for its interest in the Mountain Valley Pipeline (MVP) asset. We previously estimated an MVP sale could improve leverage by 0.3-0.4 times.”
Resuming coverage following the offering, Mr. Heywood also emphasized the progress made by the Calgary-based energy infrastructure company on its growth pipeline.
“With Q2/24, management highlighted a focus on de-risking the REEF facility and securing commercial support toward 100 per cent of export capacity,” he said. “For REEF, site clearing and geotechnical work has been completed, with work starting on the jetty. The construction is 40 per cent underpinned by fixed price EPC contracts and management is working toward an additional 10 per cent. ALA is also progressing with Pipestone II construction, progressing discussions for a third Pipestone phase and has $1.5-billion in ARP investments it can deploy in Utilities over the coming years. "
While the offering prompted Mr. Heywood to trim his near-term projections for AltaGas, given an increase to its effective interest rate and, as a result, higher-than-previously-modeled interest costs, he reaffirmed his “outperform” recommendation and $36 target for its shares. The average target on the Street is $37.63, according to LSEG data.
“Near-term capital expenditures remain focused on the Utilities segment and near immediate and high risk-adjusted capital returns; however, the improving macro environment and rising global energy security narrative is offering support to midstream opportunities over the coming years,” he conclude. “The Utilities segment provides rate base opportunities and a stable investment profile in portfolio-enhancing initiatives. Midstream efforts are expected to be directed at optimizing global export capabilities, capturing synergies between RIPET and Ferndale, and utilizing latent capacity. ALA recently made positive FID on both REEF and Pipestone II, and has expressed interest in a potential fractionator expansion at North Pine. We see leverage levels falling toward 4.8 times at year-end 2024 based on our calculation with a 50-per-cent inclusion of hybrids; however, management’s calculation excludes hybrids and we have forecast leverage to exit 2024 below its 4.5 times target at 4.3 times. An MVP sale could help improve leverage metrics even further. While we remain supportive of modestly higher leverage than peers given the stable cash flow profile, we expect deleveraging initiatives could be a catalyst for the stock. We view ALA as a name that commands a premium; ALA currently trades at a 2024 estimate EV/EBITDA multiple of 11.1 times compared to peers at 10-11 times.”