BC Mandates And Ram River Gas Processing Will Secure Stability

Key Takeaways

• Increased renewable diesel demand, alongside duties on U.S. imports, could enhance Tidewater's revenue and market stability.
  
• Strategic moves toward in-house marketing and noncore asset sales might improve financial flexibility and net margins.
  
• Expiration of Synovus agreement and external dependence risk Tidewater's margins, financial pressure requires asset sales for liquidity maintenance.

Catalysts

Tidewater Midstream and Infrastructure Ltd.

• The imposition of countervailing anti-subsidy and antidumping duties on U.S. renewable diesel imports could support long-term market stability for Tidewater renewables by potentially increasing revenue per liter due to reduced competition and reinstating market prices in British Columbia (BC).
  
• The increase in BC’s renewable fuel requirement for diesel from 4% to 8% starting April 2025, with a mandate prioritizing Canadian production, might boost demand for Tidewater's diesel, positively impacting revenue and margins by driving higher sales volumes at potentially better prices.
  
• The expectation of recovering natural gas prices in 2025 could lead to the resumption of gas processing operations at the Ram River Gas Plant, which would enhance gas processing revenue and contribute positively to overall earnings.
  
• Tidewater's successful transition to in-house marketing for its refined products, along with expanded customer bases, could lead to improved netbacks and better revenue capture, which would potentially enhance net margins and earnings through optimized pricing strategies.
  
• Continued noncore asset sales coupled with debt repayment and covenant amendments aim to bolster financial flexibility, potentially improving the net margins by lowering interest expenses, leading to higher future earnings stability.

Tidewater Midstream and Infrastructure Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Tidewater Midstream and Infrastructure's revenue will grow by 7.6% annually over the next 3 years.
• Analysts assume that profit margins will increase from -1.6% today to 0.6% in 3 years time.
• Analysts expect earnings to reach CA$12.0 million (and earnings per share of CA$0.08) by about April 2028, up from CA$-26.6 million today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 17.4x on those 2028 earnings, up from -4.1x 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 grow by 0.51% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 11.02%, as per the Simply Wall St company report.

Tidewater Midstream and Infrastructure Future Earnings Per Share Growth

Risks

• The expiration of the 5-year offtake agreement with Synovus and the need for Tidewater to market its own refined products could lead to uncertainties and potentially lower margins if they are forced to sell in less favorable markets due to oversupply in Western Canada. This could impact revenue and net margins.
  
• The current market discounts being wider than before when the Synovus offtake agreement was in effect could continue to pressure Tidewater's margins, especially if the oversupply of imported renewable diesel in Western Canada persists. This situation could negatively impact net margins and earnings.
  
• The trade case against subsidized U.S. renewable diesel imports is uncertain, and if the case is unsuccessful, Tidewater could continue to face competition from cheaper imports, negatively impacting their sales and margins for their renewable diesel products. This uncertainty could affect future earnings.
  
• There is a notable dependence on external factors, such as the British Columbia government's regulatory changes and the imposition of potential tariffs on U.S. imports. Any adverse developments in these areas could impact the company's competitive positioning and future revenue.
  
• The need to continue selling non-core assets to maintain liquidity and reduce debt suggests underlying financial pressure. Failure to achieve the expected $100 million in asset sales could affect the company's balance sheet and ability to meet operational and financial targets, thereby impacting overall financial performance.

Valuation

• The analysts have a consensus price target of CA$0.35 for Tidewater Midstream and Infrastructure 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$0.5, and the most bearish reporting a price target of just CA$0.15.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be CA$2.0 billion, earnings will come to CA$12.0 million, and it would be trading on a PE ratio of 17.4x, assuming you use a discount rate of 11.0%.
• Given the current share price of CA$0.25, the analyst price target of CA$0.35 is 28.6% higher.
• 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.