KFS Frac II Will Increase Capacity And Support Future Operations By Mid-2026

Key Takeaways

• Strategic agreements and projects are poised to enhance revenue, EBITDA, and midstream connectivity, supporting Keyera's long-term growth targets.
  
• Collaborations with AltaGas could boost market access and diversification, potentially improving net margins through increased volumes and cost efficiencies.
  
• Operational risks, increased taxes, potential U.S. tariffs, market dependency, and competition pose threats to Keyera's revenue and 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 is targeting 7% to 8% fee-based EBITDA growth by filling available capacity, primarily through strategic customer agreements. This is expected to enhance revenues and EBITDA in the coming years.
  
• The KFS Frac II debottleneck project, adding about 8,000 barrels per day of capacity, is expected to deliver strong standalone returns by mid-2026, positively impacting future revenues and earnings.
  
• With strong momentum in engineering and contracting for KFS Frac III, expected to be sanctioned in 2025 with an in-service date in 2028, potential future increases in revenue and EBITDA are anticipated upon its completion.
  
• Completion of KAPS Zone 4 engineering and progress in securing contractual backing for service in 2027 could enhance Keyera’s midstream connectivity, supporting volume growth and increased fee-based revenues.
  
• Long-term agreements with AltaGas enhance market access, diversification, and logistic efficiencies, providing a catalyst for increased revenues and improved net margins due to higher volumes and optimized costs.

Keyera Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Keyera's revenue will decrease by 0.0% annually over the next 3 years.
• Analysts assume that profit margins will increase from 6.8% today to 7.7% in 3 years time.
• Analysts expect earnings to reach CA$547.5 million (and earnings per share of CA$2.46) by about May 2028, up from CA$486.6 million today. However, there is a considerable amount of disagreement amongst the analysts with the most bullish expecting CA$613 million in earnings, and the most bearish expecting CA$490 million.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 23.4x on those 2028 earnings, up from 20.4x today. This future PE is greater than the current PE for the CA Oil and Gas industry at 11.5x.
• Analysts expect the number of shares outstanding to remain consistent over the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 6.8%, as per the Simply Wall St company report.

Keyera Future Earnings Per Share Growth

Risks

• The AEF outage scheduled for the spring is expected to have a margin impact of about $40 million, which indicates potential risks related to operational reliability and may impact net earnings.
  
• Increased cash taxes contributed to a decrease in distributable cash flow year-over-year, posing a risk to the company’s net margins and limiting cash available for dividends or reinvestment.
  
• The threat of U.S. tariffs on iso-octane and other products introduces uncertainty to the Marketing segment, and while management expects offsets, it could still affect revenue and profitability.
  
• The strong volume growth in KFS and North G&P segments relies on external market conditions such as continued basin growth and customer financial health, which could impact future revenues if market conditions change negatively.
  
• Potential competition from increased alkylate production by Valero and other market dynamics could negatively impact the demand and pricing for Keyera's iso-octane, affecting revenue and profit margins.

Valuation

• The analysts have a consensus price target of CA$45.833 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$41.0.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be CA$7.1 billion, earnings will come to CA$547.5 million, and it would be trading on a PE ratio of 23.4x, assuming you use a discount rate of 6.8%.
• Given the current share price of CA$43.33, the analyst price target of CA$45.83 is 5.5% 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.