The benefits of an integrated system are materializing for Keyera Corp. , according to Citi analyst Spiro Dounis.
He raised his target price for shares of the Calgary-based midstream oil and gas operator following stronger-than-expected 2023 results and to reflect new commercial activity on the KAPS pipeline system and the expectation for “slightly stronger” dividend growth.
“On KAPS, management announced a new 30kbpd [thousand barrels per day] contract, a significant step since the pipeline was first sanctioned back in 2019,” Mr. Dounis said. “We suspect over 80 per cent of the initial capacity has now been contracted with considerable upside to 350kbpd of capacity with low-cost pump additions. KEY remains in commercial discussions for more contracts and also appears to closer to a Zone 4 expansion with the NEBC Connector Pipe receiving approval. With Pipestone full, KEY may be able to leverage a processing expansion into more KAPS volumes. Simonette and Wapiti also benefit from spare capacity and operational leverage. With frac’s filling, the need to expand downstream also appears increasingly likely with Frac 3.”
In a research note released late Tuesday, the analyst did lowered his earnings per share projection for 2024 to $1.84 from $1.90 with his 2025 and 2026 forecast sliding to $2.11 and $2.30, respectively, from $2.12 and $2.33.
“We modestly reduce ‘24 estimate EBITDA to reflect the AEF [Alberta EnviroFuels] turnaround this spring that results in a $40-million impact,” he said. “Outer-year EBITDA estimates slightly increase to reflect KAPS potentially needing to expand (with pumps) sooner than expected, which would accelerate the need for more fractionation capacity. We forecast a 6-per-cent CAGR [compound annual growth rate] in the fee-based EBITDA through ‘28 with the FCF yield averaging 10 per cent over that time period. We also increase our dividend CAGR to 5 per cent from 4 per cent with KEY now targeting the higher-end of its 6-7-per-cent EBITDA CAGR through ‘25. Through ‘28 we expect KEY to return over 55 per cent of its CFO to shareholders.”
Reaffirming a “buy” recommendation for Keyera shares, Mr. Dounis bumped his target to $37 from $35. The average target on the Street is $36.36.
“KEY trades at a discount to historical levels despite an imminent FCF inflection,” he said. “We expect above-average EBITDA growth. Importantly, capital deployed over the last several years underwrites this organic growth with limited spending from here to achieve growth targets. Accordingly, we expect KEY to generate excess FCF that can be used to repurchase shares, increase its dividend at an accelerated rate, or reinvest in growth – a stark contrast from several years of a cash flow deficit.”