Morningstar | Keyera Misses Our Expectations; Stock Still in 3-Star Territory
No-moat Keyera reported third-quarter earnings that missed our expectations. The company reported adjusted EBITDA of CAD 160 million, or CAD 0.77 per share, up from CAD 138 million, or CAD 0.73 per share, in the year-ago quarter but down sequentially. Distributable cash flow was also below our expectations at CAD 127 million or CAD 0.61 per share. However, distributable cash flow was up from CAD 108 million or CAD 0.57 during the third quarter of 2017 but also down sequentially. Lower-than-expected performance was driven by a slower ramp up of liquids growth projects, reduced producer activity and higher operating costs in the gathering and processing business, and a lower operating margin in the marketing segment. Accordingly, we lowered our expectations to include these business headwinds.Keyera also announced that it temporarily shut down its Alberta Envirofuels marketing facility for unscheduled preventative maintenance. Full operations are expected to resume during mid-November. Accordingly, we lowered our expectations for the marketing segment during the fourth quarter.
We are lowering our fair value estimate to CAD 31 from CAD 32 on our lower outlook across Keyera’s business but maintaining our no-moat rating. The stock price reacted negatively to the earning news and is down 7% to CAD 31.50 per share. Despite the decline, the stock remains in 3-star territory.
The company maintained its monthly dividend to CAD 0.15 per share, which now equates to an annualized forward yield of 5.5% after the sell-off.
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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