Why Altagas Stock Price Performance Lagged the TSX by 106% in March

The Altagas stock price underperformed the TSX in March, but are investors noticing the company’s increasingly lower risk profile?

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In 2019, the Altagas Ltd. (TSX:ALA) stock price was on the road to recovery. This after previously disappointing investors with a dividend cut. But then came the problems. March provided a double whammy in catastrophic news for the company. First, the coronavirus took all stocks down, regardless of the details. Second, oil prices collapsed to 20-year lows. This oil price collapse was due to two factors, both of equal importance. One, the Saudi/Russia oil price war flooded the market with supply. And two, the virtual shutdown of global economies due to the coronavirus caused demand to plummet.

Altagas’ acquisition of WGL, for which it took on excessive debt, got it into trouble. But the acquisition was a good thing. It effectively gave Altagas exposure to significant revenue from the utilities business in the United States. This is a regulated business that provides steady and predictable revenue and cash flows. It is a business that is a saving grace. This is true especially in uncertain and precarious times like we are living in today.

Altagas stock price lags the TSX because of a collapsing oil price

While Altagas’ midstream infrastructure is mainly for natural gas, weak oil prices affect the energy sector as a whole. And midstream is a big part of Altagas today and its growth opportunity tomorrow. The livelihoods of oil and gas companies are threatened by the sudden collapse in oil prices. So on the surface it makes sense that the Altagas stock price would be hit hard. Altagas’ exposure to the midstream operations means that the company has counterparty risk.

But Altagas is increasingly exposed to the low risk, regulated utilities sector. More than half of Altagas’ 2020 EBITDA will come from its utilities segment, with the rest expected to come from its midstream segment. This leads me to the conclusion that the stock has been hit too hard in March. This looks like an opportunity to me.

Altagas stock price performance lags the TSX because of its heavy debtload

While Altagas has recently decreased its debtload significantly, the company remains heavily indebted. The coronavirus and its economic fallout has certainly been a call to investors to reduce their risk tolerance. This is not good for Altagas stock price. While the company benefits from increased exposure to the utilities business, it still has excessive debt levels. We investors all want the lowest risk profile today, as our risk tolerance is lower. There is enough risk out there.

Foolish bottom line

Altagas has staying power as an energy infrastructure company with more than $10 billion of assets. Natural gas extraction, processing, storage, and the utilities businesses are essential to power all of our lives. The company is insensitive to the ups and downs of economic cycles and is an essential business.

Yes, Altagas stock price underperformed relative to the TSX in March. But going forward, I think that this is a once-in-a-lifetime opportunity to buy. Altagas’ favourable risk/reward positioning is what is driving this opportunity. Lower risk comes from an increasing percentage of EBITDA coming from regulated utilities. Higher returns come in part from the stock’s very generous dividend yield of 7.88%.

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 Karen Thomas owns shares of ALTAGAS LTD. The Motley Fool recommends ALTAGAS LTD.

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