Altagas Ltd. (TSX:ALA) stock had a good day yesterday. The stock rose 3.5% after a strong Q3 earning report. Many of us of at Motley Fool have followed Altagas stock, and some of us remain positive on the stock today.
The year 2020 has cemented Altagas’ transformation plan — a plan that the company embarked on three years ago. It was a transformation that aimed to position Altagas as a diversified North American energy infrastructure business. Today, approximately 41% of Altagas’ EBITDA is from its utilities segment, while the remainder is from its midstream business.
Today, Altagas stock is looking good again after years of dismal performance. Let’s take a deeper dive into why the stock is showing strength.
Altagas earnings beat expectations
Yesterday, Altagas reported third-quarter earnings that beat expectations following an earnings beat in the second quarter. It is a clear indication that expectations are too low. EBITDA outperformed as well, rising 23% versus last year.
Highlights in the quarter include momentum in its utilities business and at its Ridley Island Propane Export Terminal (RIPET). In its utility business, management is forecasting 8% to 10% rate base growth until 2024.
At RIPET, 43,000 barrels a day (bbls/d) of Canadian propane were exported to Asia. Management expects this to increase to 50,000 bbls/d by the end of 2020. Beyond this, volumes should get to the terminal’s 80,000 bbls/d capacity. Propane and butane prices are on the rise and demand from Asia remains strong.
Another highlight is Altagas’ decision to increase its ownership in Petrogas Energy Corp. to 74%. This transaction will be immediately accretive to net income and cash flow. Synergies on the Petrogas deal total $30 million with further upside longer term. This strengthened partnership brings “key infrastructure assets and marketing expertise.” It will expand Altagas’ midstream value proposition. The ultimate goal is to create a fully integrated midstream logistics network.
Altagas stock rallies on its increasingly de-risked business
Altagas’ transformation goal was to de-risk its business. This was to be done by increasing utilities exposure and further diversifying its operations. These were the goals that motivated Altagas’ acquisition of WGL. But the company paid a heavy price for this debt-financed acquisition. Altagas eventually had to cut its dividend in 2018. The company also embarked on an aggressive strategy to get its debt under control.
But today, as we have seen again this quarter, Altagas’ transformation effort is bearing fruit.
Going forward, approximately 60% of Altagas’ normalized EBITDA will come from the low risk utilities segment. This segment will achieve growth from rate base growth and higher returns through case settlements, increased utilization and lower costs.
Altagas stock rallies on strong future
Altagas remains committed to reducing its leverage and maintaining its self-funded status. The company has reiterated its 2020 guidance of normalized EBITDA of $1.275 to $1.325 and EPS of $1.20 to $1.30. These are difficult times for most industries. The fact that Altagas is sticking with its guidance is a testament to its low-risk, highly predictable business profile.
Motley Fool: The bottom line
Here at Motley Fool, many of us are looking for good stocks to buy in this unprecedented environment. Altagas stock meets the criteria of what I look for. It has predictable cash flows, strong growth opportunities, and a stock price that is attractively valued due to low expectations.
