Keyera Corp T.KEY

TD Waterhouse Comments this morning

[hawk35]

Keyera Corp.
(KEY-T) C$28.43
 
Resuming Coverage Post Equity Offering & KFS Transaction
 
Event
We are resuming coverage of Keyera Corp. (KEY) after the close of an ~$200mm equity offering (~$230mm with the over-allotment option).
 
On December 14, 2022, KEY entered into a definitive agreement to purchase an additional 21% interest in the Keyera Fort Saskatchewan (KFS) complex from Plains Midstream Canada. Impact: SLIGHTLY POSITIVE
 
Accretive Acquisition: Including tax synergies, management expects DCF per share to average ~3% accretion annually, subsequent to the close of the transaction. The acquisition will increase KEY's ownership in KFS to 98% from 77% and is expected to close in Q1/23, subject to approvals, conditions, and adjustments. In our view, the purchase price of $365mm appears to be a reasonable valuation, which represents ~11.0x and ~9.5x forecasted annualized operating margin contribution to KEY for 2023 and 2024, respectively, based on the acquired 21% interest in KFS.
 
  Added Capacity and Core Value Chain Expansion: The transaction provides KEY with fee-for-service cash flows, driven by additional capacity to fractionation, de-ethanization, underground NGL storage, and the Fort Saskatchewan Pipeline system, which links KFS to the Edmonton-area market. Increased fractionation capacity strengthens KEY's ability to secure long-term contracts in a market with high demand and supports volumes from KAPS, in our view. This acquisition provides immediate access to additional capacity without the time lag and execution risks associated with building new capacity.
 
Model Updated: We have updated our financial model to incorporate the higher interest in KFS and related financing, which results in no change to our target price of $36.00.
 
TD Investment Conclusion
 
In addition to being immediately financially accretive, owning a higher percentage interest in KFS and additional fractionation capacity in a tight market should contribute to a more integrated service offering for KEY to effectively compete with, in our view. More broadly, we believe KEY's assets are well-positioned to serve WCSB production and provide optionality to access various high-value markets. We see KEY's solid balance sheet and incumbent franchise as advantages in navigating a dynamic oil and gas industry environment and transitioning to societies consuming lower-carbon energy sources in the long term.
 
Details
 
Strategic Rationale: The company noted that the acquired interest will provide synergies derived from operational flexibility and margin capture on increased volumes as well as tax savings. As the transaction provides additional storage, pipeline, and finished product capacity, management expects future fractionation capacity expansions to be more capital efficient, which includes potential system de-bottlenecking.
 
Outlook
 
Maintaining Balance Sheet Flexibility: Financing for the acquisition consists of cash and existing credit facilities, as well as an ~$200mm bought deal treasury offering of ~7.1mm common shares at an offering price of $28.30 per common share. We view that the approach to financing the acquisition is consistent with management's objective of maintaining balance sheet flexibility and corporate debt leverage within KEY's target range of 2.5-3.0x net debt to adjusted EBITDA.
 
Key Risks to Target Price
 
 Key risks to target price include: 1) Higher-than-expected bond yields; 2) acquisitions that do not create shareholder value; 3) operational disruptions; 4) commodity price risk; 5) unanticipated changes in environmental laws and regulations; 6) surprise industry regulation; 7) WCSB risk; 8) economic dependence on key customers; 9) unfavourable regulatory decisions; 10) large-scale project execution risk; 11) COVID-19; and 12) access to capital markets.

[Puma1back]

I get the rbc one, so thx as always for the TD. I think the upside rbc pricing could come together sooner as the ebit ramps from KAps & i the dividend growth models are upgraded.