Keyera’s valuation attractive if you can stomach oil prices

KEY - Keyera Corp

Keyera Corp. ranks amongst the largest independent midstream energy companies in Canada and has been a significant part of Canada’s energy sector for the past two decades now. It operates an integrated midstream business with extensive interconnected assets across the nation. The company engages in providing services to oil and gas producers in the Western Canada Sedimentary Basin, including NGL gathering and processing, fractionation, storage, transportation, logistics, and marketing services. Keyera also markets iso-octane, propane, butane, condensate, and crude oil to customers in Canada and the U.S. Keyera’s core infrastructure is strategically located in key producing areas of Western Canada Sedimentary basin and Edmonton/ Fort Saskatchewan energy hub. The company operates through Gathering and Processing, Liquids Infrastructure and Marketing segments. Keyera’s NGL and condensate network, including pipelines, terminals, fractionation and storage facilities are located in major North American NGL hubs.

Keyera currently has interests in 18 active gas plants and two gas plants that are under construction in Alberta. The company operates well maintained and long life facilities along with an extensive gathering system consisting of over 4,000 km of pipelines.

Investment Data

Revenue Growth & Market Exposure

With two decades of experience, Keyera has developed a strong reputation for expertise in operating complex energy processing facilities. Its integrated businesses provide customers with a full range of essential midstream services. Keyera’s broad customer base includes a high proportion of investment-grade counter-parties.

Keyera is growing organically as well as through acquisitions. The company is strengthening its leading position by investing in capital programs that are poised to support future growth. Expansion at the Simonette gas plant and Wapiti and Pipestone gas plants should drive the next phase of cash flow growth. These projects will double Keyera’s existing gas processing capacity in the region and also increase its condensate handling capacity. The company has been extending its infrastructure into Northwestern Alberta to support the liquids-rich Montney and Duvernay developments over the past few years. Once completed, these projects will fortify Keyera’s position in these areas. Phase 1 of the Pipestone gas plant when completed in 2021, will make Keyera one of the largest gas processing and condensate handling companies in the region. The company is well-positioned to capitalize on the long-term growth opportunities within the Western Canada Sedimentary Basin, which is a rich natural gas basin in Canada. All of its projects are underpinned by long-term agreements with producers which should add to its fee for service cash flows.

Keyera continues to invest in projects that generate strong rates of RoIC with its healthy balance sheet. It is focused on extending and enhancing its integrated value chain. Favourable market fundamentals are also supporting higher fractionation fees and iso-octane margins. The federal government’s decision to proceed with the Trans Mountain pipeline expansion and the progress made on LNG projects on the west coast of Canada act as strong tailwinds for the company.

Keyera expects to invest between $700 million and $800 million in 2020 to complete the second phase of the Wapiti gas plant and the Wildhorse terminal, as well as to advance the Pipestone gas plant and the KAPS pipeline system. These projects, once completed over the next three years, will extend the company’s secured growth into 2022.

Dividends

Keyera Corp is a Canadian Dividend Aristocrat with a long history of steady dividend growth since its IPO in 2003. The company last increased its dividend by more than 10% annually, has an impressive yield of more than 14% currently and has compounded its dividend growth at a rate of 8.9% over the last five years. It is targeting a payout ratio of 50%-70%.

Keyera has maintained a strong financial position and is well-positioned to fund its capital program. It is expecting to earn an annual return on capital of 10%-15% in 2022. The company has a sound track record of delivering income and growth, supported by a predominantly fee-for-service cash flow stream and virtually no direct commodity price exposure for Gathering & Processing and Liquids Infrastructure businesses. It is also targeting to grow its fee-for-service contribution of realized margin by more than 75%. Its marketing business continues to be a strong contributor to cash flow. Keyera has an approved project pipeline worth $2 billion underway in the liquids-rich Montney and Duvernay development areas. The completion of phase one of the Wapiti gas plan should support cash flow growth.

Keyera is expecting to witness a continued ramp-up of volumes and associated cash flows from its infrastructure investments in the condensate rich Montney area in 2020. Its distributable cash flow per share is expected to gain from increased volumes through new assets, lower cash taxes and maintenance capital ($35 million-$45 million in 2020, which is less than half of 2019). Capital expenditures in 2021 are expected to decrease to between $400 million and $500 million as the company completes its current growth capital program. The management reiterated that despite the current economic meltdown, its capital program will remain on schedule and on budget.

Keyera continues to grow shareholder value through prudent capital investments that are expected to generate attractive returns on capital. It has invested 1.3 billion of its 2.9 billion multi-year capital program currently underway. An extensive network of natural gas processing facilities and pipelines, a large scale, and relationships with customers form a deep moat around Keyera’s business. The management believes that Canadian hydrocarbon fuels will continue to play an essential role to meet the global energy demand, which should act as a tailwind for the company.

Competition

Enbridge, TC Energy, Pembina Pipeline, and Inter Pipeline Ltd are Keyera’s leading competitors.

Enbridge is Canada’s largest natural gas distribution provider while Pembina Pipeline is a leading midstream and transportation service provider in North America. TransCanada Pipeline is a North American infrastructure company, supplying more than 25% of natural gas consumed daily across North America. Keyera’s predominantly fee-for-service based and integrated business, strategic locations, and large scale differentiates it from peers.

TickerKeyTickerCompanySectorIndustryScoreQuoteMarket CapP/EFPEEPSYield RawYieldPayoutRatioPaymentsDividendChowderGrowthRatingIncomeRatingTollboothAmbassadorAchieverAristocratKingCountryGraph
TSE:ENBENBEnbridgeEnergyOil & Gas Midstream0.6442.8765.0545.0614.210.950.07567.563.410543.240.192378Tollbooth - UnregulatedYESYESYESNOCanada1
TSE:TRPTRPTranscanada PipelinesEnergyOil & Gas Midstream0.7461.0542.9713.4014.214.550.05315.310.712143.240.123468Tollbooth - UnregulatedNOYESYESNOCanada1
TSE:PPLPPLPembina PipelineEnergyOil & Gas Midstream0.6332.5517.9012.1814.212.670.07747.740.9438122.520.119776Tollbooth - UnregulatedNONOYESNOCanada1
TSE:IPLIPLInter Pipeline LtdEnergyOil & Gas Midstream0.5112.555.399.8514.211.270.03823.820.3780120.480.067125Tollbooth - UnregulatedNONONONOCanada1
TSE:KEYKEYKeyera CorpEnergyOil & Gas Midstream0.5620.364.508.9214.212.280.09439.430.8421121.920.157367Tollbooth - UnregulatedNONOYESNOCanada1
TSE:GEIGEIGibson Energy Inc.EnergyOil & Gas Midstream0.4222.063.2319.1214.211.150.06176.171.182641.360.061725Tollbooth - UnregulatedNONONONOCanada1

Bottom Line

Canadian oil companies are currently suffering from a slowdown that has plagued the entire energy sector. In addition, they are also highly susceptible to counter-party credit risk. However, the current crisis also offers a good opportunity to invest in good stocks at reasonable valuations. Keyera Corp. is one such lucrative stock with a double-digit dividend yield. The company is positioned very well in terms of growth opportunities in the midstream chain through 2022.

Keyera has ample growth opportunities given its expertise, a strong balance sheet, and financial flexibility. It continues to execute on significant growth capital program with the ongoing work at Wapiti and Pipestone gas plants, KAPS pipeline and Wildhorse Terminal. Keyera will be firmly positioned in the liquids-rich area of northwestern Alberta once all its projects are completed. Revenue and cash flow should also increase and support future dividend growth as the new projects and assets go live. Keyera remains confident in its business outlook despite a sharp decline in its share price due to the unprecedented environment.

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DISCLOSURE: Please note that I may have a position in one or many of the holdings listed. For a complete list of my holdings, please see my Dividend Portfolio.

DISCLAIMER: Please note that this blog post represents my opinion and not an advice/recommendation. I am not a financial adviser, I am not qualified to give financial advice. Before you buy any stocks/funds consult with a qualified financial planner. Make your investment decisions at your own risk – see my full disclaimer for more details.
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