The impact of rising inflation and interest rates was very apparent during third-quarter earnings season for Canadian midstream companies, according to Canaccord Genuity analyst John Bereznicki.
“As we had expected, the third-quarter earnings season was a mixed bag in our coverage universe,” he said. PPL and GEI benefitted from steady results in their core infrastructure operations, along with strong marketing segment contributions that allowed them to remain active on their NCIBs. Conversely, ALA faced margin pressures in its NGL export business, while KEY reported further cost inflation on its KAPS project. While TWM experienced some sequential moderation in Q3/22 crack spreads at its Prince George Refinery, economics at this facility nonetheless remained very attractive from an historical perspective.”
“While the upstream sector has faced chronic inflationary pressures since late last year, these headwinds are becoming increasingly apparent in the midstream space from both an operating and capital perspective. Although midstream companies are taking steps to mitigate the impact of these cost pressures, we believe they must ultimately be passed on to operators. In our view, this is particularly true for assets that are in high demand (such as fractionation capacity in Central Alberta and gas processing capacity in the Pipestone). For new infrastructure, we believe midstream companies are being forced to revisit targeted return thresholds, and pricing assumptions as borrowing costs also move higher. The renewable fuel space has not been immune to these pressures, with Tidewater Renewables reporting cost inflation at its flagship HDRD and RNG players also disclosing project cost headwinds. We believe these pressures may curtail investment and force some infrastructure backers to partner with entities that have access to relatively low-cost capital.”
Mr. Bereznicki continues to expect the pace of rig additions in the Western Canadian Sedimentary Basin (WCSB) to slow in 2023 as operators “moderate their budget growth.” However, he predicts an “active” winter drilling season, which will “set the stage for continued mid-single digit midstream volume growth next year.”
“In our view LNG Canada should also support WCSB volume growth as it moves closer to first gas, while the creation of a viable development framework with the Blueberry First Nation could potentially create further volume tailwinds for the sector,” he said.
Making “modest” estimate changes following earnings season, Mr. Bereznicki made a group of target adjustments. They are:
- AltaGas Ltd. ( “buy”) to $29 from $31. The average on the Street is $31.80.
- Gibson Energy Inc. ( “hold”) to $25 from $24. Average: $25.25.
- Keyera Corp. ( “buy”) to $34 from $33. Average: $33.62.
- Pembina Pipeline Corp. (“buy”) to $52 from $51. Average: $50.56.
- Tidewater Renewables Ltd. ( “speculative buy”) to $18 from $19. Average: $19.35.
He maintained a “buy” rating and $1.75 target for Tidewater Midstream and Infrastructure Ltd. , exceeding the $1.62 average.
“There are no changes to any of our recommendations,” Mr. Bereznicki said. “PPL remains our focus name, and we believe TWM represents significant value (and optionality on Tidewater Renewables) for investors able to go down-cap.”