Scotia Capital analyst Robert Hope thinks the outlook and sentiment surrounding Canada’s pipeline and midstream group is “as strong as it has been in many years.”
“The Canadian pipeline and midstream group has had a strong 2024, with median share price returns of 26 per cent (ex. SOBO-T and TWM-T),” he saiD. “Share price performance has largely been driven by multiple expansion, though we have seen some estimate revisions upwards as well. That said, while strong, we do note that the Canadian group has again underperformed its U.S. peers which have increased by 33 per cent year-to-date. Sentiment for the midstream and pipeline space has turned more favourable driven by moderating interest rates, strong quarterly results, improving outlook for natural gas demand, strengthening balance sheets, and new project announcements. Overall, tailwinds have greatly exceeded headwinds this year, which we expect will continue into 2025. Our view is that the sentiment for energy infrastructure stocks is as strong as it has been since 2017.”
In a report released Wednesday, Mr. Hope revisited valuations in the space with the expectation the environment for natural gas infrastructure should continue to improve in 2025.
“Our preference is for names levered to natural gas infrastructure as we expect this asset class has the best growth outlook,” he said. “Our favourite names are TRP-T and KEY-T in the group.”
He added: “The growth outlook for natural gas infrastructure levered names turned notably more positive in 2024. In Canada, the ramp-up of LNG Canada is just around the corner, which we expect will drive both natural gas and natural gas liquids (NGLs) volume growth in 2025 and beyond. This should improve returns for existing infrastructure as well as provide incremental investment opportunities. This is despite the weakness in AECO gas pricing in 2024, which has caused some volumes to shut in, though we expect these to return in 2025. More broadly, across the continent, we see electricity demand inflecting higher. While renewable generation will have a part to play, it is increasingly clear that natural gas power demand will move higher. This, in addition to increasing LNG demand, should drive continued high utilization of the North American pipeline network and provide investment opportunities to debottleneck and enhance the system. We continue to expect crude oil infrastructure will be highly utilized, but see fewer significant upside growth opportunities. Overall, we maintain our bias for natural gas levered infrastructure names (KEY-T, PPL-T, TRP-T).”
Mr. Hope made these target adjustments:
* Keyera Corp. (“sector outperform”) to $48 from $42. Average: $41.45.
Analyst: “Keyera remains one of our favourite stocks given the numerous upside opportunities in front of it. We are increasingly confident that Keyera will move forward with additional fractionation capacity at Fort Saskatchewan, and now include $1.50/sh of upside in our target valuation. We also note that the quality of its gathering and processing cash flow continues to improve as its contracted Northern assets represent the lion’s share of cash flow from that segment”