Keyera Corp. (TSX: KEY) engages in the energy infrastructure business in Canada. It operates through Gathering and Processing, Liquids Infrastructure, and Marketing segments. The company's Gathering and Processing segment own and operate raw gas gathering pipelines and processing plants, and condensate handling services.

Investment Rationale

• Keyera is a Cash Cow: The group not only has a consistent track record of dividend distribution; it also has a proven track record of consistently increasing dividend. Moreover, its shares are featuring a dividend yield of 7.97%, which is significantly high, given the lower interest rate environment. Keyera's dividend yield is approximately 2.41 times of the S&P/TSX Composite Index median dividend yield of 3.3%, and approximately nine times of the Canada 10-year Government Bond Yield of 0.87%. A high yielding stock with consistent dividend payment track record tends to remain in the limelight, especially in low-interest rate environment.

Dividend History. Source: Refinitiv (Thomson Reuters)

• Strong Balance Sheet: The company continue to maintain a strong balance sheet at the end of Q3FY20, with a net debt to adjusted EBITDA ratio of 2.4 times, two investment grade credit ratings, access to CAD 1.4 billion credit facility, and minimal long-term debt maturity in the next 5 years. Further, in today’s uncertain markets, the company’s financial strength and liquidity enhance its capacity to navigate challenges, while providing flexibility to be opportunistic.

Source: Company Presentation

• Quality Clientele: Keyera’s customer bases comprise 78% creditworthy counterparties including, investment grade/secured and split rated customers.

Source: Company Presentation

• Investment grade credit ratings: Despite a turmoil in the oil industry, Keyera continued to maintain an investment grade credit rating. In light of the sharp decline in the commodity prices and S&P Global’s outlook for the industry, in April, S&P lowered Keyera’s corporate credit rating from “BBB/stable” to a “BBB-/stable”. At the same time, S&P lowered Keyera's medium-term notes issued in June 2018 to 'BBB-' from 'BBB', and the rating on its subordinated hybrid notes issued in June 2019 to 'BB' from 'BB+'. Keyera’s corporate credit rating and issuer rating on its medium-term notes assigned by DBRS Limited remain unchanged at “BBB” with a “stable” trend. The issuer-rating assigned by DBRS on Keyera’s subordinated hybrid notes also remain at “BB (high)”.

• Improved Performance on Sequential Quarter Basis: On a sequential quarter basis, the company reported improved margin profile and return in the third quarter of FY20. During the period, EBITDA margin expanded by 360 bps to 25.4%, Operating margin improved 220 bps to 5.5%, Net Margin increased to 4.7% against 3.4% reported a quarter before period. Moreover, Return on Equity also increased by 50 bps to 1.1% against 0.6% reported in the second quarter of FY20.

• Risk Associated with Investment: The group is exposed to a variety of risks, including currency exchange risk associated with the purchase and sale of NGLs and iso-octane. Also, the company is slightly exposed to the volatility in the crude oil price within its marketing segment. 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.

Financial Highlights: Q3FY20

Source: Company Filing

• For the three months ended September 30, 2020, net earnings were CAD 33 million, CAD 121 million lower than the same period in 2019 due to lower operating margin and revenue.
• The operating margin was CAD 203 million, CAD 109 million lower than the same period in 2019 primarily due to i) the inclusion of an unrealized non-cash loss of CAD 12 million associated with risk management contracts from the Marketing segment in 2020 compared to an unrealized non-cash gain of CAD 23 million in 2019; and ii) CAD 76 million in the lower realized margin.
• Cash flow from operating activities for the third quarter of 2020 was CAD 95 million, CAD 164 million lower than the same period in 2019 due to lower financial results from the Marketing and Gathering and Processing segments, as well as increased cash requirements to fund higher volumes of propane and butane inventory compared to the prior year.
• Distributable cash flow was CAD 175 million for the three months ended September 30, 2020, CAD 9 million lower than the same period in 2019. The lower financial results from the Marketing and Gathering and Processing segments were partly offset by i) a CAD 25 million current income tax recovery in the third quarter of 2020 compared to a CAD 15 million current income tax expense in the prior year, and ii) lower maintenance capital expenditures in the current year.
• Further, the group reported a pay-out ratio of 54% year to date and expected to continue to fund its growth capital projects without issuing common equity.
• Net earnings for the third quarter of 2020 were CAD 33 million or CAD 0.15 per share against CAD 154 million or CAD 0.72 per share in the same quarter of FY19.

Segment Highlights

Gathering and Processing

• Revenue declined by CAD 25 million against the third quarter of FY19.
• Operating margin for the Gathering and Processing declined by CAD 25 million in Q3FY20 on a YoY basis, with CAD 13 million in lower operating margin due to lower processing throughput across many facilities, CAD 5 million in fee reductions provided to customers at certain gas plants in the South effective January 1, 2020, to improve the competitiveness of fees and Lower operating margin at the Wapiti gas plant.

Liquids Infrastructure

• Revenue increased by CAD 1 million against the same quarter of FY19.
• Operating margin improved by CAD 1 million due to higher storage revenues as strong demand resulted in higher contracted volumes and incremental margin associated with cavern 16 in Fort Saskatchewan, which came into service in April 2020.

Marketing

• Revenue plummeted by CAD 98 million on a YoY basis s due to lower average sales volumes and significantly lower average sales prices for all products resulting from the significant decline in commodity prices since March 2020.
• Realized margin slumped by CAD 51 million due to CAD 31 million in lower iso-octane margins because of higher average butane feedstock costs and weak product premiums relative to the prior year and lower liquids blending sales margins in the third quarter of 2020. 

Valuation Methodology (Illustrative): EV to Sales Based Valuation Metrics

Note: All forecasted figures have been taken from Refinitiv (Thomson Reuters)

Peer Comparison

Source: Refinitiv (Thomson Reuters)

Top-10 Shareholders

The top 10 shareholders have been highlighted in the table, which together forms around 31.69% of the total shareholding. CI Investments Inc.  and M & G Investment Management Ltd. [Activist]. hold the maximum interests in the company at 7.07% and 6.59%, respectively.

Source: Refinitiv (Thomson Reuters)

Stock Recommendation: Despite the current economic situation, Keyera posted solid third quarter 2020 financial results due to the resilience of the Liquids Infrastructure business and its disciplined and effective risk management program that continued to protect margins in the Marketing segment. Since the beginning of March, the energy industry has been challenged not only by the pandemic but also due to a sharp decrease in global oil prices. However, the global crude oil supply response was greater than initially anticipated and in June supported a recovery in commodity prices from the extreme lows experienced in March, April and May of this year.

Further, The Liquids Infrastructure segment performed well in the third quarter, generating CAD 100 million in operating margin (Q3 2019 – CAD 98 million), while the Marketing segment delivered realized margin of CAD 64 million (Q3 2019 – CAD 116 million). Keyera expects the Marketing segment to generate realized margin of between CAD 300 million and CAD 340 million in 2020, although at the lower end of this range given the outage at AEF.

Moreover, the company’s shares are yielding higher with 7.97% dividend yield and consistent track record of dividend payment regardless of the business cycle.

Therefore, based on the above rationale and valuation, we have given a “Buy” recommendation at the closing price of CAD 24.15 on January 28, 2021.

Source: Refinitiv (Thomson Reuters)

*Recommendation is valid at January 29, 2021 price as well.

Disclaimer

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