Morningstar | Raising Our FVE on Keyera, but Stock Remains in 3-Star Territory
After taking a second look at no-moat Keyera’s fourth-quarter results, we are increasing our fair value estimate to CAD 33 from CAD 31. We now expect increased performance driven by an increase in condensate services as a result of projected oil sands supply growth.Despite the increase, the stock is still trading in 3-star territory. 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.
Furthermore, The company maintained its monthly dividend to CAD 0.15 per share, which now equates to an annualized forward yield of 5.5%.
As a reminder, Keyera’s fourth-quarter results shattered expectations. The company reported adjusted EBITDA of CAD 248 million, or CAD 1.18 per share, up from CAD 197 million, or CAD 0.97 per share, in the year-ago quarter. Distributable cash flow was also above expectations at CAD 200 million, or CAD 0.96 per share. Distributable cash flow was also up from CAD 174 million, or CAD 0.90 per share, during the fourth quarter of 2017. Better-than-expected performance was driven by record performance from the marketing segment, liquids infrastructure growth projects, and increased demand for condensate services.
For a detailed look into Canadian crude market and pipeline trends, please refer to our January Energy Observer,"Pipelines Are Canada’s Lifelines.â€
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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