Keyera Corp.

Keyera Corp. (TSX: KEY) operates as a midstream energy business in western Canada. The company’s primary operations consist of gathering, processing, and fractionation of natural gas in western Canada; storage and transportation of crude oil and natural gas byproducts; and marketing of natural gas liquids.

Key Updates:

• Signed Solar Power Deal: Keyera and Samsung Renewable Energy Inc. announced the signing of a 15-year PPA. The 25-megawatt (MW) capacity solar generation facility will be located north of Drumheller, Alberta, and construction will begin in the fall of 2021.
• Income Play: The company has a strong track record of dividend payment, which indicates stable cash flow and operational resiliency. During FY03 to FY19, the company has reported a CAGR of ~8% in dividend payment. At the last traded price, the stock was offering a dividend yield of ~8.473% on an annualized basis, which is lucrative considering the current interest rate environment.

Source: Company Presentations

• Positive Long-term outlook: As per the management, the long-term outlook of the company remains solid aided by stable growth from the Gathering and Processing segment. The company has a competitive cost structure facility and would be benefited from improving natural gas prices, driven by improved macro demand. Moreover, the company is focusing on lower- emission energy sources and improving pipeline takeaway capacity in Alberta, which further provides significant opportunities for the company to grow without additional capital investment.

Q3FY20 Financial Highlights:

• KEY declared its quarterly results, wherein the company posted CAD 712.838 million, compared to CAD 834.477 million in Q3FY19. The decline was majorly due to a significantly lower income from the Gathering & Processing segment and Marketing segment.
• Operating margin stood at CAD 202.547 million, lower than CAD 311.402 million in pcp. The decline was primarily attributable to lower revenue, partially offset by lower expenses (CAD 510.291 million versus CAD 523.075 million in pcp).
• Earnings before income tax plunged to CAD 39.015 million, from CAD 200.964 million in Q3FY19. The decline was majorly attributable to a higher general and administrative expenses (CAD 18.258 million versus CAD 16.085 million in pcp) and inclusion of impairment expense of CAD 53.850 million. The decline was primarily offset by lower finance costs (CAD 31.711 million versus CAD 33.217 million in pcp) and lower depreciation, depletion and amortization expenses (CAD 63.469 million versus CAD 66.627 million in Q3FY19).
• Net earnings stood at CAD 33.436 million, as compared to CAD 154.428 million in the previous corresponding period.
• The company reported a cash balance of CAD 11.604 million, while total assets stood at CAD 7,569.074 million.                     

Q3FY20 Income Statement Highlights (Source: Company Reports)

Risks: The company’s income could be impacted by the purchase and sale of NGLs and iso-octane and currency fluctuations.

Valuation Methodology (Illustrative): Price to Cash Flow

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

Stock Recommendation:

During the quarter, the company identified certain deficiencies in the construction of the Wildhorse Terminal, crude oil storage and blending terminal being developed in Cushing, Oklahoma and the company is working closely with its EPC contractor to resolve the deficiencies and would focus on the mechanical completion of the project within FY20. As per the Management, the project would be operational in from the first half of FY21 and is expected to support the overall performance of the company, which is a key positive. We have valued the stock using P/CF based relative valuation approach and arrived at a target price offering double-digit upside potential (in % terms). We have considered Inter Pipeline Ltd, Pembina Pipeline Corp and Gibson Energy Inc etc., as a peer group for the comparison purpose.  Hence considering the aforesaid facts, we recommend a ‘Buy’ rating on the stock at the closing price of CAD 22.64 on December 24, 2020.

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

Inter Pipeline Ltd

Inter Pipeline Ltd (TSX: IPL) is a Canada-based energy infrastructure company. The Company is engaged in the transportation, processing, and storage of energy products in Calgary, Alberta, Canada.

Key Highlights

• Offering a Decent Dividend Yield: The company is offering a decent dividend yield of 3.91%, with a track record of consistent dividend payment over the past ten years. The company’s dividend is approximately 1.16x the TSX Composite dividend yield of 3.35% and 5.6x of the Canada 10-Year Government Bond Yield of 0.7%.

Dividend History. Source (Thomson Reuters)

• Reduced Debt Outstanding: Inter Pipeline's total debt outstanding decreased by CAD 114.5 million to CAD 7,204.8 million in the current quarter from CAD 7,319.3 million as of June 30, 2020.
• Investment Grade Credit Profile: The company has investment grade credit rating; BBB by DBRS and BBB- by S&P. Also, leverage and credit ratios expected to improve once HPC is fully operational.
• High Quality Counterparties: The company has high qualities counterparties, with ~75% of Canadian revenue sourced from investment grade entities.
• Insiders Buying: Insiders remain net buyer in 2020. Recently in September, October, and November, the insiders have bagged shares of IPL, which implies that they are bullish on the future performance of the company.

Insiders Activity. Source: Refinitiv (Thomson Reuters)

Financial Highlights:

• Inter Pipeline generated FFO of CAD 196.0 million in the current quarter, a 4% decrease from the third quarter of 2019.
• Inter Pipeline’s third quarter net income decreased by CAD 41.2 million to CAD 38.7 million in 2020
• The company net income was unfavourably impacted by the loss on disposal of assets, a non-cash loss on a foreign exchange financial instrument, and the decrease in FFO, as discussed above.
• The company declared cash dividends of CAD 52 million or CAD 0.12 per share.
• Further, during the quarter under consideration, the company has entered agreement to divest the majority of European storage business for approximately CAD 715 million.

Risk Associated with investment

The company’s business is exposed to the slowdown in energy demand. Also, the next wave of COVID-19 outbreak could weigh on the group’s performance as its could further reduce energy demand.

Valuation Methodology (Illustrative): Price to Cash Flow

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

Stock Recommendation

Given the uncertainties hovering over the global energy demand, the group performance was decent in the third quarter of 2020. The performance was largely supported by high qualities counterparties, with ~75% of Canadian revenue sourced from investment grade entities. Further, the company is offering a decent dividend yield of 3.91% relatively higher than TSX Composite dividend yield and Canada 10-year Government bond yield. Therefore, based on the above rationale and valuation, we have given a “Buy” recommendation at the closing price of CAD 12.27 on December 24, 2020. We have considered Enbridge Inc, TC Energy Corp and Emera Inc etc., as a peer group for the comparison purpose.

1-Year Price Chart (as on December 22, 2020). Source: Refinitiv (Thomson Reuters).

Disclaimer

The advice given by Kalkine Canada Advisory Services Inc. and provided on this website is general information only and it does not take into account your investment objectives, financial situation and the particular needs of any particular person. You should therefore consider whether the advice is appropriate to your investment objectives, financial situation and needs before acting upon it. You should seek advice from a financial adviser, stockbroker or other professional (including taxation and legal advice) as necessary before acting on any advice. Not all investments are appropriate for all people. The website www.kalkine.ca is published by Kalkine Canada Advisory Services Inc. The link to our Terms & Conditions has been provided please go through them. On the date of publishing this report (mentioned on the website), employees and/or associates of Kalkine do not hold positions in any of the stocks covered on the website. These stocks can change any time and readers of the reports should not consider these stocks as advice or recommendations later.