Growing Demand From LNG Canada And TMX Will Spur Future Service Expansion

Key Takeaways

• Advancements in growth projects and infrastructure could boost net capacity, revenue, and margins through increased demand and service expansion.
  
• Strong financial positioning and strategic investments, including share buyback, support future earnings growth and enhanced shareholder returns.
  
• Expansion and reliance on Western Canadian gas developments risk revenue, while market shifts and environmental regulations could challenge profitability.

Catalysts

Engages in the gathering and processing of natural gas; and transportation, storage, and marketing of natural gas liquids (NGLs) in Canada and the United States.

• Keyera's continued advancements in capital-efficient growth projects, including the Frac II debottlenecking and KFS Frac III expansion, are expected to significantly increase net fractionation capacity, which could lead to increased revenue and margin growth.
  
• The strategic focus on expanding the integrated platform, especially in the Montney fairway where significant natural gas development is anticipated, suggests potential future revenue growth due to increased service demand.
  
• Strong financial performance with a net debt to adjusted EBITDA ratio below the targeted range positions Keyera well to invest in high-growth opportunities, potentially improving future earnings and shareholder value.
  
• Share buyback approval provides flexibility to enhance shareholder returns, potentially impacting earnings per share positively if executed strategically.
  
• Growing demand for Keyera's Liquids Infrastructure segment, driven by key developments such as TMX and LNG Canada, indicates a sustained increase in fee-for-service cash flow, likely supporting revenue and margin expansion.

Keyera Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Keyera's revenue will decrease by -0.3% annually over the next 3 years.
• Analysts assume that profit margins will increase from 6.0% today to 7.7% in 3 years time.
• Analysts expect earnings to reach CA$576.7 million (and earnings per share of CA$2.56) by about December 2027, up from CA$446.9 million today. However, there is some disagreement amongst the analysts with the more bearish ones expecting earnings as low as CA$485 million.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 22.0x on those 2027 earnings, down from 23.0x today. This future PE is greater than the current PE for the CA Oil and Gas industry at 11.1x.
• Analysts expect the number of shares outstanding to decline by 0.59% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 7.36%, as per the Simply Wall St company report.

Keyera Future Earnings Per Share Growth

Risks

• The execution of Keyera's expansion projects, such as the KFS Frac II debottleneck and the KFS Frac III, involves significant capital outlays and is subject to contracting uncertainties. Delays or hurdles in these projects could impact future revenue streams and net margins.
  
• The company's reliance on growth in the Western Canadian natural gas sector, including developments like LNG Canada and TMX, poses a risk if these developments are delayed or if market conditions deteriorate, potentially affecting future revenue and earnings.
  
• While Keyera has a strong balance sheet, increased competition or a change in market dynamics for its marketing segment could lead to lower realized margins, impacting overall profitability and net earnings.
  
• The potential for integration and operational challenges exists with any large company acquisition or collaborations with new customers, particularly given recent large-scale activities in the Wapiti region. This could affect revenue stability and growth if Keyera cannot capitalize on these expanded opportunities.
  
• The potential for macroeconomic factors and environmental regulations to impact the pricing and demand for Keyera’s products, such as iso-octane and other NGLs, poses a downside risk to the company's revenues and marketing margins.

Valuation

• The analysts have a consensus price target of CA$45.5 for Keyera based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of CA$50.0, and the most bearish reporting a price target of just CA$39.0.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2027, revenues will be CA$7.4 billion, earnings will come to CA$576.7 million, and it would be trading on a PE ratio of 22.0x, assuming you use a discount rate of 7.4%.
• Given the current share price of CA$44.91, the analyst's price target of CA$45.5 is 1.3% higher. The relatively low difference between the current share price and the analyst consensus price target indicates that they believe on average, the company is fairly priced.
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.