Keyera Corp.
I don't like it, I love it
Our view: The strong Q4/23 results and the reconfirmed 2024 guidance reinforce our positive thesis for Keyera. We expect cash flow to benefit from positive basin trends, including growing WCSB gas and NGL production (evidenced by newly announced contracts) as well as a favourable macro environment for its Marketing division, which continues to benefit from management's ability to leverage its physical assets and logistics capabilities. Further, we expect investors to be increasingly drawn to the company's strong balance sheet with debt/EBITDA ending 2023 below the 2.5-3.0x target range (credit facility calculation).
Key points:
New contracts for KAPS and KFS demonstrate Keyera's ability to benefit from growing WCSB production. As part of the Q4/23 release, Keyera announced: (1) roughly 30,000 b/d of long-term contracts for KAPS with a weighted average contract term of 12 years; and (2) around 33,000 b/d of fractionation commitments at KFS with a weighted average contract term of 13 years and with about half of the volumes being new commitments and the other half being renewals of existing contracts.
Marketing business well-positioned in 2024, in spite of the upcoming AEF outage. While we continue to forecast realized margins at the high end of the company's $310-350 million guidance for the segment in 2024, strong near-term fundamentals suggest that there are more tailwinds for the segment than the headwind presented by the six-week AEF outage this spring that was announced by Keyera as part of the Q4/23 results release. Specifically, we point to the continuation of strong volumes and utilization of the KFS fractionation facilities, and robust fundamentalsrelating to the iso-octane market, including favourable trends relating to octane blend product imports into North America, gasoline regulations in the U.S., and the premium to the RBOB price.
Enviable financial position. We project that Keyera will be free cash flow positive in 2024 (after dividends and all capex), and with an already low debt/EBITDA that exited 2023 at 2.2x (credit facility calculation), Keyera retains significant optionality to fund strategic growth projects (e.g., fractionation expansion) and/or increase the return of capital to shareholders. Even if Marketing margins decline to the conservative "base" range, we project leverage would still be at, or below, the low end of Keyera's 2.5-3.0x debt/EBITDA target range.
Nudging up our estimates to reflect the strong performance observed in Q4/23 for G&P and Liquids Infrastructure. We have increased our 2024 and 2025 EBITDA estimates to $1.157 billion and $1.189 billion, respectively (up from $1.152 billion and $1.183 billion, respectively). For DCF/share, we have increased our estimates in 2024 and 2025 to $3.21 and $3.37, respectively (up from $3.18 and $3.34, respectively).
A solid outlook for 2024 and beyond
Positioned to benefit from growing WCSB gas and NGL production, evidenced by new contracts. We believe that Keyera’s integrated footprint of gas processing plants and the pipeline connectivity via KAPS into its natural gas liquids (NGL) fractionation, storage and terminalling assets centered around the Keyera Fort Saskatchewan (KFS) facility will provide the company with an ability to benefit from growth in Western Canada Sedimentary Basin (WCSB) natural gas and NGL production.
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New contracts for KAPS and KFS. Keyera announced that throughout 2023, it executed new contracts for KAPS and KFS with the majority of the contracts being completed in Q4/23. Specifically, Keyera disclosed the following contracts: (1) roughly 30,000 b/d of new long-term contracts for KAPS with a weighted average contract term of 12 years, and it expects roughly half of these volumes to begin contributing midway through 2024 and ramp up by 2029; and (2) approximately 33,000 b/d of fractionation commitments at KFS with a weighted average contract term of 13 years and with about half of these volumes being new commitments and the other half being renewals of existing contracts. We believe that Keyera will continue to benefit from the integration of KAPS and KFS, and increased WCSB volume growth which could drive additional contracting opportunities for KAPS, as well as the potential to secure long-term contracts that underpin returns for new expansion projects (e.g., KAPS Zone 4, KFS fractionation expansions).
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“Great” conversations with potential KAPS customers. With optimism around potential WCSB growth, including via the start-up of the LNG Canada export facility, Keyera noted that it is in active discussions with other producers that could result in additional contracted volumes.
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Integrated system could result in an expansion at KFS. Keyera is evaluating a number of options to expand capacity, which could include a capital efficient and relatively quick de- bottlenecking solution, as well as a larger expansion via the addition of another fractionation train. We expect to hear more about these potential projects towards the end of 2024.
2024 guidance ranges reaffirmed. The company reaffirmed its 2024 guidance ranges which it originally provided in December 2023 and continues to expect:
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Maintenance capital: In 2024, Keyera expects to spend $90-110 million (we remain at $100 million), with approximately $20 million being recoverable in 2024.
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Growth capital: Keyera anticipates growth capital of $80-100 million (we remain at $90 million) in 2024, with roughly $60 million for various sanctioned optimization projects at Simonette, Wapiti, KAPS, and AEF, and $20-40 million contingent on the potential sanctioning of KAPS Zone 4 and fractionation capacity expansions.
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Cash taxes: The company continues to expect cash taxes in 2024 to be between $45-55 million (we remain at $48 million).
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Base Marketing realized margin: The company continues to expect its “base” Marketing realized margin guidance of $310-350 million (our 2024 and 2025 estimates remain at $350 million).
Marketing guidance update to be provided in May; our marketing estimate could prove to be quite conservative. As per its usual timing, the company expects to provide 2024 Marketing guidance in May when it reports its Q1/24 results. Notwithstanding the six-week AEF outage scheduled for this year that Keyera expects to negatively impact EBITDA to the tune of $35-45 million, we still believe there is upside to the company’s realized Marketing margin guidance of $310-350 million. Looking at 2023 results, realized Marketing margin was $479 million inclusive of a $24 million realized hedging loss. With management’s conference call commentary pointing to a fairly similar macro environment in 2024, we believe there could be material upside to our existing Marketing segment forecast of $350 million for 2024.
Maintaining a strong financial position. At the end of Q4/23, the company had a Net Debt/Adjusted EBITDA ratio of 2.2x (credit facility calculation), which was below its target range of 2.5-3.0x. Additionally, the company exited Q4/23 with a dividend payout ratio at the low-end of its 50-70% target range.
Other updates as part of the quarter
AEF maintenance scheduled for the spring of 2024; no change in Marketing guidance. Keyera disclosed that it will take the plant offline for roughly six weeks to proactively complete maintenance to facilitate AEF's ability to operate at full capacity until its next major scheduled turnaround in 2026. The company expects the outage to negatively impact its 2024 realized margin by approximately $35-45 million with no impact on maintenance capex. However, due to strong near-term fundamentals, Keyera still expects to be within its "base" Marketing realized margin guidance of $310-350 million for 2024 (our $350 million estimate heading into the quarter is unchanged.
Q4/23 results were well ahead of our expectations and consensus. In Q4/23, adjusted EBITDA was $339 million compared to our forecast of $281 million and consensus of $291 million (11 estimates; range of $273-303 million). DCF/share was $1.02 compared to our estimate of $0.81 and consensus of $0.92 (seven estimates; $0.81-1.02). As shown in Exhibit 1, each of the three operating segments exceeded our forecast.