Post by
hawk35 on Feb 16, 2023 12:06pm
RBC fnal comments after conference call
February 15, 2023
Keyera Corp.
Setting the table for low capital intensity growth
Our view: With tangible signs that KAPS is nearing completion (e.g., linefill has begun), we believe investors will shift their focus from the construction costs for KAPS to the optionality of Keyera’s integrated midstream footprint that stands to benefit from the rising tide of natural gas and natural gas liquids (NGL) volumes in Western Canada. We positively view the newly announced Pipestone gas plant expansion and the ability for Keyera to benefit from filling up significant uncontracted capacity at KAPS that can then feed product into Keyera Fort Saskatchewan (KFS), including the newly acquired NGL fractionation capacity.
Key points:
Poised to stand out from the crowd. While the construction of KAPS and its numerous, and significant, cost overrun announcements have been an overhang for the stock, completion of the capital-intensive project is just around the corner. After it is placed into service, we believe Keyera could stand out from many of its North American midstream peers for its: (1) built-in growth driven by contractual upside in EBITDA from KAPS ramping up through 2025; (2) upside optionality from additional KAPS contracting aided by Keyera’s integrated footprint that includes the recently acquired incremental interest in KFS; (3) low capital intensity as capex materially declines following the construction of KAPS; and (4) strong balance sheet (i.e., Keyera exited 2022 at 2.5x debt/EBITDA).
Pipestone expansion given the green light. Keyera highlighted that it sanctioned a 40 MMcf/d expansion at its Pipestone gas plant, which will increase capacity to 260 MMcf/d. The project is underpinned by long-term, take-or-pay agreements and carries an anticipated capital cost of $60–70 million. Timing-wise, the expansion is subject to regulatory approval, which Keyera expects to receive in March 2023, and if approved, the company believes the project could be completed in Q1/24.
Modest updates to 2023 guidance items. Keyera expects growth capex of $200–240 million (up from $140–180 million), primarily reflecting KAPS capital spending that shifted from 2022 to 2023, and the company now anticipates no cash taxes in 2023 (previously $10–25 million of cash taxes). Of note, Keyera will release Marketing guidance in early May following the conclusion of the NGL contracting season.
Modest reduction in estimates to reflect higher Corporate and decommissioning costs. For 2023 and 2024, our new EBITDA estimates are $1.024 billion and $1.084 billion (down from $1.030 billion and $1.090 billion), respectively, driven solely by higher General & Administrative costs with no change in our operating segment estimates. For DCF/share, our new 2023 and 2024 estimates are $3.07 and $3.29 (down from $3.12 and $3.32), respectively, due to the reduction in our EBITDA forecast as well as higher decommissioning costs based on disclosures in the annual report.
KAPS almost done
Although multiple cost overrun announcements have been an overhang for the stock, we positively view the company’s update that the project is 99% complete and, more importantly, the tangible signs that final commissioning activities are under way (e.g., linefill has begun). We view KAPS as a strategically important project for Keyera, as it helps to link its network of gas processing facilities with its NGL fractionation and storage terminal in Fort Saskatchewan. The integrated footprint should provide Keyera opportunities to secure long-term contracts via a bundled offering of services with the ultimate benefit being growth in fee-based cash flow.
New disclosures for the project include:
· KAPS is 99% complete and commissioning and linefill are under way;
· the company’s cost estimate remains unchanged at $1.0 billion (net to Keyera), of which $905 million was incurred as of December 31, 2022; and
· timing-wise, Keyera expects the pipeline to be operational in Q2/23 (previously “end of the first quarter of 2023”), although we view this as a very minor change in timing and not at all material, particularly as we expect only a modest contribution from KAPS in 2023 due to the contractual ramp-up into 2025.
Target/Upside/Downside Scenarios
Keyera Corp
Valuation
Our $36.00/share price target is based on applying an 11.0– 11.5x EV/EBITDA valuation to our forward EBITDA estimate adjusted for a full-year contribution (post ramp-up) from certain assets (e.g., KAPS, Wapiti). Our target multiple is also consistent with a blended contribution from Gathering & Processing (at 11.5x EBITDA), Liquids Infrastructure (at 12.5x EBITDA), and Marketing (at 8.5x EBITDA). The risk[1]adjusted expected total return to our price target supports our Outperform rating for the shares.
Upside scenario
Our upside scenario of $42.00 is based on a 1x increase in EV/EBITDA valuations, which would bring the valuation close to the average valuation for midstream stocks over the past 10 years leading into the onset of COVID. This scenario also includes roughly $3/share associated with upside from volumes at new facilities and the development of spare land in Fort Saskatchewan.
Downside scenario
Our downside scenario of $23.00 per share is based on a scenario where Marketing results are at the low end of the long-term “base realized margin” range and Gathering & Processing margins are similar to 2020 levels (i.e., cyclical trough).
Investment summary
We expect Keyera’s shares to outperform the peer group for the following key reasons:
• Poised to benefit from improving basin trends. We believe that Keyera remains poised to benefit from increased WCSB volumes and demand for midstream infrastructure, at its existing facilities as well as a rising tide of future demand driving additional contracting for KAPS. On top of the potential for improved throughput and fee-driven revenue, we also see the potential for Keyera to add long-term contracts, which could help lock in future cash flows and reduce future volatility.
• Attractive financial setup. We forecast that Keyera’s debt/ EBITDA will remain at a manageable level through the construction of KAPS and within, or below, Keyera’s targeted 2.5–3.0x debt/EBITDA range (credit facility calculation). We expect that the payout ratio will continue to be at or below 70% through 2024. Further, the company intends to finance its growth capex on a self-funded basis for equity (i.e., no DRIP, ATM, or discrete equity).
• Potential catalysts. KAPS completion on time and within its revised budget; additional contracts for KAPS; Marketing results that support the company’s guidance; and new projects underpinned by long-term, take-or-pay contracts that can be financed on an equity self-funded basis.
Risks to rating and price target
KAPS delays and/or material cost overruns; low spreads and fewer opportunities in the marketing business; a material reduction in throughput at the company’s gathering and processing facilities; an inability to stem the impact of volume declines through operating cost reductions; ineffective hedges; and projects not proceeding on a time frame or with economics in line with our expectations