In the world of utilities and safe investments, significant growth is not usually an option. That’s why it’s so exciting for me to talk about AltaGas (TSX: ALA) stock. And after recently releasing its fourth-quarter (Q4) earnings, we have more reason than ever to seriously consider the potential upside in AltaGas’s stock price.
Let’s unpack this and try to figure out what’s next for this company and ALA stock.
2022 results show stability and growth for AltaGas
Before we dive into the earnings report, let’s review the company. AltaGas is an energy infrastructure giant with more than $20 billion in assets and a strong position in two distinct areas. The first is the utilities business. This business is comprised of regulated natural gas utilities spread out across North America. The second is the midstream business. This business includes natural gas gathering and processing assets as well as natural gas export terminals.
In 2022, AltaGas reported a 4.5% increase in normalized earnings before interest, taxes, depreciation, and amortization (EBITDA). The utilities segment benefitted from higher rates, customer growth, and asset optimization, which led to an 18% increase in EBITDA. In the midstream segment, EBITDA for the full year declined, as butane pricing slid. But as the company said at the time, this pricing weakness was temporary, and things have since recovered. In fact, in the fourth quarter, EBITDA in the midstream segment increased 95% to $163 million.
In summary, AltaGas’s results illustrate a year that was characterized by continued growth in both of the company’s segments, as well as investment for future growth. This is starting to be reflected in AltaGas’s stock price, but there’s plenty upside, in my view.
Midstream segment is boosted by long-term bullish fundamentals
Part of the benefit of AltaGas stock is its diverse business, which is resilient through market cycles and operating environments. Its utilities business is the safe, secure business that has little risk. Its midstream segment, on the contrary, has more volatility and more risk, which means that it theoretically also has more upside.
Take the growth in AltaGas’s export terminals as an example of the potential growth here. In the fourth quarter, AltaGas exported 97,000 barrels per day (BPD) of liquid petroleum gas (LPG). Fewer than four years ago, this number was zero. So, we can see that the ramp-up has been rapid.
Looking ahead, this growth shows no signs of stopping. In fact, AltaGas’s export capability has been significantly expanded with its acquisition of Petrogas, which was in response to the growing demand from Asia. Today, AltaGas’s LPG exports make up almost 16% of Japan’s LPG imports and 14% of South Korea’s total LPG imports. Furthermore, the reopening of China can be expected to boost demand for AltaGas’s imports even more.
Steadily growing dividend to boost AltaGas’s stock price
Along with the obvious benefits of owning a stock that’s benefitting from strong fundamentals, we also have the added benefit of dividend growth. Since 2018, AltaGas has grown its annual dividend by 250% to the current $1.12 per share. Today, AltaGas stock’s dividend yield is a generous 4.66%.
The benefits of AltaGas’s business model are becoming more and more obvious with every step the company takes to de-risk its business. The two most important ways that AltaGas is, in fact, de-risking its business is through strengthening its balance sheet and lowering the risk of the midstream segment.
The strengthening of its balance sheet is pretty straightforward — AltaGas expects to reach its net debt to EBITDA target of five times in the medium term. De-risking the midstream segment is a little more complicated. Steps that AltaGas is taking include securing contracts that are longer term — 10 to 15 years is the goal.
The company also includes such moves as chartering ships to transport its gas, which gives cost certainty and significant flexibility associated with loading of the ships. In fact, in 2023, AltaGas is expecting delivery of two new vessels. This will reduce shipping costs by over 30% versus market rates and reduce pricing volatility.
In closing, AltaGas’s Q4 and year-end 2022 results have confirmed my optimistic view of ALA stock.
