Why AltaGas (TSX:ALA) Could Be the Best Canadian Stock to Buy for 2020

AltaGas Ltd (TSX:ALA) has had an exceptional 2019 and with the impressive work it’s done there is no reason it can’t continue this pace of growth in 2020.

| More on:

After roughly five years with a declining share price, that began at the peak of 2014 and bottomed in early 2019, AltaGas Ltd (TSX:ALA) has finally turned the corner and the shares have begun to recover.

At a share price of roughly $20, it now trades just slightly off its 52-week high, and the stock has a ton of momentum going forward.

A better business plan going forward coupled with exciting growth opportunities that have come online and a stronger balance sheet has made AltaGas a top buy and investors have noticed, but can it continue to outperform?

Its biggest growth opportunity, the Ridley Island Propane Export Terminal (RIPET), came online early in the second quarter of 2019 and is already seeing volumes of roughly 40,000 barrels per day (bbl/d).

In the third quarter alone, RIPET already contributed $37 million in EBITDA to AltaGas’ business.

The RIPET has been a major project not only for AltaGas, but also for the entire upstream industry it serves, as it gives more takeaway capacity to foreign markets for our domestic product, which is what upstream producers in Western Canada have needed so badly for so long.

By September 30, AltaGas had sold off roughly $2.2 billion of non-core asset sales, exceeding its $1.5 billion to $2 billion goal it set for itself. This was an important step to help delever the balance sheet without disrupting its core operations that it’s been so focused on growing and improving.

It’s also been important to reduce its debt in order to maintain its investment grade credit rating.

AltaGas estimates that by year end it will have reduced its net debt by roughly $3 billion, as it has already reduced it by $2.4 billion as of the end of the third quarter.

The company has reduced all that debt at the same time that it was able to fund roughly $1.35 billion in expansion projects in both its midstream and utilities segments.

It still expects to earn roughly $1.2 billion to $1.3 billion in earnings before interest, taxes, depreciation and amortization (EBITDA) this year, as well as funds from operations (FFO) of roughly $850 million to $950 million.

The $3 billion in net debt reduction from 2018’s year-end net debt of roughly $10.1 billion will leave AltaGas with net debt of roughly $7.1 billion at the end of 2019.

Considering the company is estimating at least $1.2 billion in EBITDA for 2019, its year end net debt to EBITDA ratio should be roughly 5.9 times, which is still high, but much better than 2018’s year-end net debt to EBITDA of 10.1 times.

Going forward, its main commitment in 2020 is to continue to unlock the growth potential of its assets, allowing it to grow its operations and consequently its EBITDA without taking on significant debt.

On the midstream side, it plans to increase gas processing volumes as well as increase volumes to RIPET, which should bring considerable growth.

On the utilities side, it wants to grow its rate base and improve its returns through better efficiency and lower costs. It’s also expecting the completion of the Marquette Connector Pipeline in the fourth quarter of 2019, which should help its business into 2020.

The pipeline, which will add a second natural gas transmission pipeline running to Michigan, will have a capacity of roughly 144 million cubic feet per day.

This is crucial given that the only other pipeline is more than 50 years old and is already at capacity and will bring substantial potential to AltaGas’ utility business.

All in all, it’s been a good year for AltaGas thus far, strengthening both its operations and its financials. It continues to target more of the same in 2020. Given its execution on its plans in 2019, I don’t see a reason why it can’t happen.

Investors should expect to see its stock continue to rise into next year, as the market searches for more utilities and midstream exposure, while also having more faith in AltaGas itself now that it has significantly reduced its leverage ratios.

It’s one of the top stocks in its space, so look for AltaGas to be a top performer again in 2020.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium service or advisor. We’re Motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer, so we sometimes publish articles that may not be in line with recommendations, rankings or other content.

Fool contributor Daniel Da Costa has no position in any of the stocks mentioned. The Motley Fool recommends ALTAGAS LTD. AltaGas is a recommendation of Stock Advisor Canada.

More on Dividend Stocks

money goes up and down in balance
Dividend Stocks

This 6% Dividend Stock Is My Top Pick for Immediate Income

This Canadian stock has resilient business model, solid dividend payment and growth history, and a well-protected yield of over 6%.

Read more »

ways to boost income
Dividend Stocks

1 Excellent TSX Dividend Stock, Down 25%, to Buy and Hold for the Long Term

Down 25% from all-time highs, Tourmaline Oil is a TSX dividend stock that offers you a tasty yield of 5%…

Read more »

Start line on the highway
Dividend Stocks

1 Incredibly Cheap Canadian Dividend-Growth Stock to Buy Now and Hold for Decades

CN Rail (TSX:CNR) stock is incredibly cheap, but should investors join insiders by buying the dip?

Read more »

bulb idea thinking
Dividend Stocks

Down 13%, This Magnificent Dividend Stock Is a Screaming Buy

Sometimes, a moderately discounted, safe dividend stock is better than heavily discounted stock, offering an unsustainably high yield.

Read more »

Canadian Dollars bills
Dividend Stocks

Invest $15,000 in This Dividend Stock, Create $5,710.08 in Passive Income

This dividend stock is the perfect option if you're an investor looking for growth, as well as passive income through…

Read more »

A Canada Pension Plan Statement of Contributions with a 100 dollar banknote and dollar coins.
Dividend Stocks

3 Compelling Reasons to Delay Taking CPP Benefits Until Age 70

You don't need to take CPP early if you are receiving large dividend payments from Fortis Inc (TSX:FTS) stock.

Read more »

A worker overlooks an oil refinery plant.
Dividend Stocks

Better Dividend Stock: TC Energy vs. Enbridge

TC Energy and Enbridge have enjoyed big rallies in 2024. Is one stock still cheap?

Read more »

Concept of multiple streams of income
Dividend Stocks

Got $10,000? Buy This Dividend Stock for $4,992.40 in Total Passive Income

Want almost $5,000 in annual passive income? Then you need a company bound for even more growth, with a dividend…

Read more »