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Topic: Growth Stocks

Acquisition diversifies operations for high-dividend Keyera

A Member of Pat McKeough’s Inner Circle recently asked for his advice on a company that provides midstream services primarily to the Alberta oil and gas sector.

The company’s primary focus on one region adds risk, says Pat, especially considering the price volatility for Canadian crude and gas. Still, a high 6.5% dividend and the company’s recent acquisition south of the border add appeal.

Q: Pat, may I have you advice on whether Keyera Corp. is a buy? Thank you.


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Keyera Corp. (Symbol KEY on Toronto; www.keyera.com) provides a number of midstream services to the oil and gas industry, including the collection, processing, storage and shipment of oil and gas. All of the company’s assets are in Alberta, with the exception of one rail and truck terminal in Oklahoma.

The company is organized into two business segments:

Keyera’s Gathering and Processing business owns and operates raw gas-gathering pipelines and processing plants. They collect and process natural gas and remove waste products to isolate natural gas liquids (NGLs). The NGL is then pumped through long-distance pipelines to clients.

The Liquids business uses a network of facilities to process, store and transport by-products of natural gas processing including ethane, propane and butane. It then markets those products, including condensate, or “drip gas.” That is used as a solvent, cleaner and fuel. In addition, this segment includes Keyera’s iso-octane facilities at Alberta EnviroFuels (“AEF”) and its 50% ownership interest in the Base Line Terminal, a crude oil storage facility.

Keyera also holds a 30% interest in the Norlite Diluent Pipeline, a 489-kilometre pipeline that transports natural gas condensates (diluents) that are used for diluting heavy oil to make it lighter and easier for transport. Keyera owns and manages the Fort Saskatchewan condensate system, which connects the Norlite pipeline to existing infrastructure in Fort Saskatchewan.

The company’s other facilities include the iso-octane facilities at Alberta EnviroFuels. Iso-octane is a blending component used in premium gasoline production and the Edmonton-based plant generates enough iso-octane to fuel roughly 45,000 vehicles per day. In addition, it owns 50% of the Base Line Terminal, a crude oil storage facility adjacent to its Alberta EnviroFuels facility. Base Line has a storage capacity of 4.8 million barrels of crude oil.

Growth Stocks: New projects should enhance future cashflow

Keyera continues to invest in new projects. In the first three quarters of 2018, the company invested $328 million on the following projects: $105 million for 50% ownership interest in the South Grand Rapids pipeline, a section of the Grand Rapids Pipeline System in Alberta; $110 million for the Oklahoma Liquids Terminal, a logistics and liquids blending terminal located near Tulsa, Oklahoma; $41 million for the purchase of the Keyera Butane System that it had previously leased; $39 million for the Pipestone project, a natural gas-processing and liquids-stabilization plant near Grande Prairie, Alberta; $11 million for a newly constructed 10-inch gathering pipeline that connects Keyera’s Strachan and Ricinus gas plants; and $10 million for the purchase of the Willesden Green natural gas plant in Alberta.

Since 2013, Keyera’s revenue has increased only 3.0%, from $3.3 billion in 2013 to $3.4 billion in 2017 (rising to $3.6 billion in 2014, then dipping to $2.5 billion in 2015 and $2.5 billion in 2016 on sharply lower NGL prices).

However, Keyera’s cash flow has strengthened significantly during that time. Cash flow rose 77.2%, from $288.1 million in 2013 to $510.4 million in 2017. Cash flow per share rose 46.7% over the same period, from $1.84 to $2.70, on more shares outstanding. (All per share figures adjusted for a 2-for-1 split in 2015.)

In the quarter ended September 30, 2018, revenue increased 51.9%, to $1.2 billion from $764.8 million a year earlier. The jump was due primarily to higher volumes associated with the newly acquired Oklahoma Liquids Terminal. Cash flow per share was up 7.0%, to $0.61 per share from $0.57 per share.

While Keyera’s primary focus on one region and one commodity adds risk, its high dividend yield adds to its appeal. In September 2018, the company increased its monthly dividend by 7.1%, to $0.15 a share from $0.14. The stock now yields 6.5%, and the dividend looks sustainable.

The stock trades at 11.5 times Keyera’s 2019 forecast cash flow of $2.41 a share. New projects under development should push the 2020 cash flow up to $3.21. Keyera shares trade at just 8.7 times that estimate.

Recommendation in Inner Cirle: Keyera Corp. is okay for aggressive investors to hold.

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