Is Keyera a Buy After Its Solid Fourth-Quarter Earnings?

Given Keyera’s solid quarterly performance and healthy growth prospects, I am bullish on it.

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Earlier this week, Keyera (TSX:KEY) reported an impressive fourth-quarter performance, driving record financials for 2023. Boosted by its solid performance, the company’s stock price has increased by over 1.93% since reporting its fourth-quarter earnings. Despite the recent increase, it still trades at a discount of over 4.4% compared to its 52-week high. So, let’s assess buying opportunities in Keyera by looking at its recent performance and growth prospects.

Keyera’s fourth-quarter performance

During the December-ending quarter, Keyera generated an adjusted EBITDA (earnings before interest, tax, depreciation, and amortization) of $339.2 million, a 59.7% increase from the previous year’s quarter. Besides, its distributable cash flows increased from $104 million to $234 million. The strong performances across its three segments – Liquids Infrastructure, Gathering and Processing, and Marketing – drove its financials.

In October 2023, the Calgary-based midstream company completed the construction of the KAPS (Key Access Pipeline System) pipeline. It will transport natural gas liquids (NGL) and condensate from the Montney and Duvernay basins to the company’s liquids processing and storage hub. Amid the expansion, the company has added 40 million cubic feet per day of capacity, which is fully contracted under long-term agreements and operates at full capacity.

All in all, the company’s financial position looks solid, with its net debt-to-adjusted EBITDA standing at 2.2 by the end of the quarter. It was lower than its guidance of 2.5 to 3. Further, it had $1.1 billion of liquidity as of December 31. So, the company is well-equipped to fund its growth initiatives. Now, let’s look at its growth prospects.

Keyera’s growth prospects

Keyera operates a low-risk midstream business, with around 65% of its cash flows generated from long-term fee-for-service and take-or-pay contracts. Its integrated high barrier-to-entry assets generate healthy cash flows while maximizing its margins. Given its solid underlying business, the company has been growing its discounted cash flows/share at a CAGR (compound annual growth rate) of 8% over the previous 15 years. So, its underlying business looks solid and is less susceptible to market volatility.

Further, the company has allocated $80 to $100 million for growth capital expenditures this year and $90 to $110 million for maintenance capital expenditures. Besides, the expansion of its KAPS has added around 30,000 barrels per day of long-term commitment for its Liquids Infrastructure segment, with an average contract term of 12 years. Meanwhile, the management expects around half of these volumes to start contributing from midway through this year and will ramp up until 2029.

Further, the company has added around 33,000 barrels per day of fractionation commitments to its KFS (Keyera Fort Saskatchewan), with the weighted average life of these contracts at 13 years. Bolstered by these growth initiatives, the company’s management expects its adjusted EBITDA to grow 6 to 7% through 2025 while keeping its marketing segment constant. So, the company’s growth prospects look healthy.

Investors’ takeaway

Earlier this week, the U.S. Labor Department announced that the consumer price index rose 3.1% in January, higher than analysts’ expectations of 2.9%. Besides, with the expectation of global growth slowing down this year, I expect equity markets to remain volatile in the near term.

So, investors should strengthen their portfolios by adding stocks with solid underlying business and excellent dividend growth records. Supported by its stable cash flows, Keyera has raised its dividend at a CAGR of 6% since 2008. KEY stock currently pays a quarterly dividend of $0.50/share, with its forward dividend yield at 6.1%. Its payout ratio stands at 49%, lower than its 50 to 70% guidance. Given Keyera’s solid fourth-quarter performance, healthy growth prospects, high dividend yields, and attractive forward price-to-sales multiple of 1.2, I am bullish on it.

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 Rajiv Nanjapla has no position in any of the stocks mentioned. The Motley Fool recommends Keyera. The Motley Fool has a disclosure policy.

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