Altagas Ltd. (TSX: ALA) surprised many investors on October 19 when the company announced better-than-expected third-quarter earnings and hiked its dividend.
The earnings surprise and the dividend increase were two positive developments for investors who had doubts about the company’s ability to offer future payout raises, as it struggled to fund a massive acquisition it announced earlier this year.
The company’s shares are under pressure since the company announced the $8.4 billion acquisition of the U.S.-based WGL Holdings. After dipping ~14% this year, indications are that Altagas shares are on the verge of a rebound. Here is why.
WGL funding plan
In the third-quarter report, the company unveiled some solid steps that will help allay investors’ concerns regarding the WGL acquisition. And the most encouraging among them is that the company has a funding plan in place to go ahead with this deal.
Altagas plans to fund the WGL deal with the proceeds from its $2.6 billion subscription receipts, US$3 billion available under a fully committed bridge facility, and the rest from the sale of some of its assets.
“Altagas continues to pursue the first phase of its asset sale process, which includes the Blythe and Tracy facilities in California and certain small non-core assets,” the company said in the earning statement. “Additional financing steps are expected to be undertaken in 2018, including additional asset sales, offerings of senior debt, hybrid securities and equity-linked securities (including preferred shares), subject to prevailing market conditions.”
These details suggest that the company is in a good shape to close this deal in the first half of 2018 once it gets regulatory approval. The successful asset sales and the price Altagas will get are still some of the uncertainties in this funding plan.
But as crude oil prices firm up around $50 a barrel, chances are that Altagas will be able to get a good value for its assets on the block.
Cenovus Energy Inc. (TSX: CVE)(NYSE: CVE), for example, is divesting its assets successfully in Alberta, fetching better-than-expected prices. This month, it agreed to sell its Palliser crude field to Schlumberger Ltd. and Torxen Energy for $1.3 billion, getting closer to its target to pay down debt from its earlier deal to buy ConocoPhillips’s Canadian operations.
The bottom line
Altagas’s 7.19% dividend yield looks safer after the company’s strong performance in the third quarter and its update on its WGL acquisition.
With this high yield, investors can earn a $2.19-a-share yearly dividend, which is forecast to grow 8-10% per annum through 2021 on the successful closing of WGL deal.
Altagas offers an attractive yield and a growth potential. If you are willing to stomach a little extra risk, this is the good time to take a position.
