Morningstar | Keyera Has Another Strong Quarter; Stock Still in 3-Star Territory
No-moat Keyera reported second-quarter earnings that exceeded our expectations. The company reported adjusted EBITDA of CAD 210 million, or CAD 1.02 per share, up from CAD 133 million, or CAD 0.71 per share, in the year-ago quarter and ahead of our expectations. The better-than-expected performance was driven by rising commodity prices and favorable pricing in the marketing segment and continued strong processing volumes in the gathering and processing segment.Second-quarter distributable cash flow came in slightly below our expectations, driven by higher-than-expected maintenance capital spending. Distributable cash flow was CAD 156 million, or CAD 0.75 per share, a 45% increase from the second quarter of 2017. The increase was driven by rising commodity prices and favorable pricing in the marketing segment and strong processing volumes in the gathering and processing segment. For the full year, the company expects to invest CAD 1 billion-1.1 billion in its growth projects and the 50% acquisition of the South Grand Rapids diluent pipeline, up CAD 100 million from the prior-quarter outlook. We think Keyera will have the financial flexibility to execute this strategy.
The company increased its monthly dividend to CAD 0.15 per share, which equates to an annualized forward yield of 4.6%. Despite our expectation for the company to average 8% dividend growth over the next few years, the current yield stands at the bottom of the Canadian midstream sector.
The second-quarter upside was insufficient to justify a fair value estimate increase. The stock is trading near CAD 38, which represents a 20% premium to our valuation.
Keyera’s operations don’t enjoy many of the regulatory protections afforded to pipeline operators, highlighted by the absence of strict approval requirements for new projects. Most of the company’s operations are not underpinned by long-term contracts and can be terminated on short notice. Keyera’s gathering and processing operations are tied directly into natural gas producers’ wellheads, which exposes the company to production cuts. Furthermore, increasing natural gas supply from the Marcellus and Utica regions in the United States amplifies Keyera’s risk of underutilizing its assets. We are maintaining our no-moat rating.
Keyera is engaged in the business of operating natural gas midstream businesses in Canada. Midstream entities operate in the oil and gas sector between the upstream sector, which includes oil and gas exploration and production businesses, and the downstream sector, which includes the refining, distribution and retail marketing of finished products. Co. is organized into two integrated businesses, (i) The Gathering and Processing Business Unit which Co. is engaged in owning and operating raw gas gathering pipelines and processing plants and (ii) The Liquids Business Unit consisting of natural gas liquids infrastructure and marketing.
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