Keyera Corp (TSX: KEY) is a Canada-based integrated energy infrastructure company with extensive interconnected assets and depth of expertise in delivering energy infrastructure solutions. Its predominantly fee-for-service based business consists of natural gas gathering and processing; natural gas liquids processing, transportation, storage and marketing; iso-octane production and sales; and an industry-leading condensate system in the Edmonton/Fort Saskatchewan area of Alberta.

Investment Rationale

• An Income Play: The Company delivered a consistent dividend growth over the years, irrespective of the economic cycles, which is encouraging. Even though the sector is going through a steep pain owing to COVID-19 pandemic, the company has increased its dividend payment, which shows the stable cash flow generations capability of the group. During 9MFY20, the company’s distributed dividend stood at CAD 316.897 million, higher than CAD 289.608 million, a year ago. At the last closing price (November 19, 2020), the stock was offering a dividend yield of ~8.7%, which is enormous considering the low-interest-rate environment.

 

                            

Dividend History (Source: Company Reports)

• Integrated Value Chain: The company offers an integrated value chain which consists of liquid and gas storage to Marketing services. The company has Strategically located gas plants in liquids-rich western Alberta with approximately 4,400 km gas gathering network. Moreover, the company has an industry-leading condensate system with highly utilized fractionation, storage, transportation and upgrading assets which has high barriers to entry. In the future, the company would focus on the Liquids Infrastructure segment, which has high barriers to entry and assets are located across the Western Canada Sedimentary Basin.         

                                                          

Source: Company Reports

• Higher contribution from Fee-for-service: The company offers Fee-for-service for its energy infrastructure solutions to customers and derived ~63% of its overall realized margin. Fee-for-service has minimum risk with commodity prices. During FY15 to FY19, the fee-based segment reported a ~10% CAGR to CAD 657 million, which is commendable.              

                                     

Fee-for-Service Realized Margin Trend (Source: Company Presentation)

• Focus on increasing Fee for service contribution: From a long-term perspective, the company intends to derive ~75% of its Realized Margin from Fee-for-service segment, augurs well for improved risk management. Currently, the company has a solid clientele of more than 100 customers and has allocated ~CAD 2.9 Billion for the above segment.

                         

                                     

Source: Company Presentation

• Ample liquidity and strong balance sheet: The company has a strong balance sheet with manageable debt-component. Notably, Debt to Equity of the company stands roughly at 1x, which is impressive considering the capital-intensive nature of business. The group reported net debt/adjusted EBITDA at 2.4x, which is impressive. Furthermore, the company has ample liquidity of CAD 1.4 billion as an undrawn credit facility, which seems sufficient to withstand the current challenging time. Moreover, the Management highlighted minimal long-term debt maturities in the next five years, which consists only ~10% of total long-term debt, augurs well for the overall liquidity level.                  

                             

Source: Company Reports

• Improved Return on Invested Capital, Best-in-Class Cost Structure: The company maintained an impressive return on invested capital on an annualized basis. KEY generated a~15% of average annual return on capital during FY16 to FY20, which is a key positive. Moreover, KEY is investing CAD 2.2 billion growth capital program, which is expected to deliver a return on capital of 10% to 15% in FY22 once all projects achieve their annual run rate. With a double-digit return on capital on a consistent basis, the group indicates a solid operational performance over the years and with its prudent capital management, we believe KEY would maintain the momentum in the foreseeable future. Furthermore, the group is focusing on improving the reliability of its assets with the company’s gathering and processing optimization plan and is expected to provide cost-efficiency and other benefits to the group and its customers as well. With the above optimization strategies, KEY is likely to deliver best-in-class cost structure within the industry and is expected to enhance the company’s market share in the coming days.
• Steady growth in Distributable Cash Flow per Share: The Group is indulged into marketing and distribution for its integrated business model, which subsequently allows the group to access high-value markets for our customers and generate free cash flow. Historically, from FY08 to FY20, the company generated a ~9% CAGR growth in its Distributable Cash Flow per Share, which is commendable. We believe the momentum to continue in the foreseeable future, as the company would invest in growth capital projects.

                      

                              

Source: Company Reports

• KAPS Pipeline System to deliver long term growth: The company is working in its KAPS Pipeline System which is expected to be constructed period between FY21 to FY23. The above project is built to transport condensate and natural gas liquids from the Montney to the Liquids Infrastructure assets in Fort Saskatchewan. The Management highlighted that, and it would enhance the company’s existing value chain, competitive position, generate stable long-term cash flows and provide a platform which would support KEY’s long-term growth objectives across upstream and downstream segments. As mentioned by the company, the company would invest CAD 400 million to CAD 450 million in growth capital projects, which is mainly allocated for KAPS.                      

                             

Source: Company Presentation

• Stock Hovering in a Bullish Zone: On the daily price chart, shares of Keyera Corp trading in bullish territory, with price traded well above the support levels of 200-day, 100-day, 50-day, 30-day, 10-day and 5-day Simple Moving Average (SMA), which is typically considered as a bullish technical indicator in a stock. Moreover, the moving averages are rising, which indicates that support levels are also on the uptrend, which is considered as a bullish indicator. The Moving Average Convergence Divergence (MACD) is also rising with the difference between 12-day and 26-day EMAs is positive, which indicates an upside momentum in the stock. Also, the 14-day as well as 9-day RSI is hovering in a neutral zone and mostly tilted towards the overbought territory, another positive indicator.

Source: Refinitiv (Thomson Reuters)

• Risk Associated to Investment: The group is exposed to a variety of risks, including foreign currency exchange risk associated with the purchase and sale of NGLs and iso-octane. Also, the company is slightly exposed to the crude oil price risk in its marketing business. Further, Keyera is subject to a range of laws and regulations imposed by various levels of government and regulatory bodies in the jurisdictions in which it operates. In particular, income tax laws, environmental laws and regulatory requirements can have a significant financial and operational impact on Keyera’s business.

Guidance

• For FY20, the company expects realized margin from the Marketing segment within CAD 300 million and CAD 340 million. KEY expects a tax recovery of CAD 35 million to CAD 45 million, while maintenance capital expenditures in between CAD 20 million to CAD 25 million.
• The corporation assumes a growth capital expenditure within CAD 500 million to CAD 550 million during the period coupled with an additional planned investment of around CAD 70 million in regard to the butane distribution infrastructure at Kinder Morgan’s Galena Park facility.

Q3FY20 Financial Highlights:

• KEY announced its quarterly results, wherein the company posted revenues of CAD 712.838 million, as compared to CAD 834.477 million in the previous corresponding period (pcp). The decline was primarily attributed to lower revenue from Gathering & Processing (CAD 108.486 million versus CAD 133.057 million in Q3FY19) and Marketing businesses (CAD 546.067 million versus CAD 644.141 million in Q3FY19) compared to the previous corresponding period.
• Operating margin stood at CAD 202.547 million, lower than CAD 311.402 million in pcp, due to lower income and a marginal decline in expenses.
• Earnings before income tax stood considerably lower at CAD 39.015 million, from CAD 200.964 million in Q3FY19, due to a lower operating margin, an inclusion of impairment expense amounting CAD 53.850 million coupled with a lower gain from net foreign currency gain on the US debt and other.
• The company reported its Adjusted EBITDA at CAD 196.163 million, lower than CAD 268.933 million. Funds from operations stood at CAD 190.910 million, as compared to CAD 227.403 million in pcp.
• Net earnings dipped to CAD 33.436 million, as compared to CAD 154.428 million, a year ago.
• The company reported a cash balance of CAD 11.604 million, while total assets are recorded at CAD 7,569.074 million.

Source: Company Reports              

                   

Q3FY20 Income Statement Highlights (Source: Company Reports)

 

Top 10 Shareholders

The top 10 shareholders have been highlighted in the table, which together forms around 31.70% of the total shareholding. CI Investments Inc. and RBC Global Asset Management Inc. hold the maximum interests in the company at 7.72% and 6.39%, respectively.

Source: Refinitiv (Thomson Reuters)

 

Valuation Methodology (Illustrative): EV to EBITDA based Valuation Metrics

(Note: All forecasted figures and peers have been taken from Thomson Reuters).

Peer Comparison

Source: Refinitiv (Thomson Reuters) 

Stock Recommendation:

Going forward, the company would look for investments that are backed by long-term take-or-pay contracts with credit-worthy counterparties while the company will fund its growth capital projects without issuing common equity.

Gathering and Processing Activity offers long term potential for growth as its offers organizations to reducing its overall cost structure and optimizing its portfolio of gas plants and increasing the overall utilization of its gas plants resulting in improving customer netbacks.

Within the Liquids Infrastructure segment, the industry witnessed a gradual recovery in the bitumen production, as crude prices stabilized from the extreme lows experienced between March and May of 2020. The volume of condensate handled showed sign of improvement in Q3FY20 and was up by 4% from Q2FY20. During the period, capacity utilization of the two fractionation units at Fort Saskatchewan complex stood to 97%, against 88% Q2FY20, which is promising.

Last but not least, the company has access to Western Canada Sedimentary Basin, which offers production of several profitable segments like Ethane, Propane, Butane, Condensate and Iso-octane.

Therefore, considering the aforesaid facts and valuation, we recommend a ‘Buy’ rating in the stock at the closing price of CAD 21.99 on November 19, 2020.

KEY Daily Technical Chart (Source: Refinitiv, Thomson Reuters)

*Recommendation is valid at November 20, 2020 price as well.

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Disclaimer

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