Gordon Pape: An Energy Company Worth Owning

These are dark days for Canada’s energy sector. Low prices for oil and natural gas and lack of significant progress on new pipeline capacity have hit share prices hard.

As of the close on Aug. 26, the S&P/TSX Capped Energy Index was showing a one-year loss of 41 per cent, and it continues to trend down.

But amidst all the carnage, there are a few energy stocks that are still worth owning. One of them is Keyera Corp. (TSX: KEY), which is not a component of the Energy sub-index.

Keyera is a mid-stream energy company that services oil and gas producers in the Western Canada Sedimentary Basin. Its activities include natural gas and natural gas liquids gathering and processing, iso-octane production and sales, fractionation, storage, transportation, logistics, and marketing services. It also provides diluent logistics services for oil sands customers. It owns a network of over 4,000 kilometres of pipelines and 17 natural gas processing plants. The company operates mainly in the Edmonton/Fort Saskatchewan region of Alberta.

Given the problems in the energy industry, the company’s strong second-quarter results came as a pleasant surprise. Earnings were almost double those of the same period a year ago.

Keyera said profit in the quarter was $219.4 million ($1.03 per share), a significant increase from $106.8 million ($0.52 a share) in the same period last year. For the first half of the year, earnings were $253.2 million ($1.19 per share), up from $194.5 million ($0.94 per share) in 2018.

The improvement was due largely to the contribution of the Marketing segment, which delivered an operating margin of $117 million, compared to $74 million last year. The company said the results were largely due to a higher contribution from sales of iso-octane (a hydrocarbon).

Distributable cash flow was $144 million ($0.67 per share), down from $156 million ($0.75 per share) last year. The company said this was “due to the timing of maintenance capital and higher current income taxes”.

Keyera increased its dividend for the ninth year in a row, by 7 per cent to $0.16 a month ($1.92 per year). That brought the forward yield to 6 per cent. Dividend increases are rare in the energy sector these days and a sign that the company is prospering even in difficult times.

The question is can it continue? The payout ratio in the first half of the year, based on distributable cash flow and a lower dividend, was 76 per cent, compared to 56 per cent the year before.

However, the company was upbeat in its message to shareholders, saying: “Our midstream services remain in high demand and our capital projects are on schedule and on budget. Favourable market fundamentals are supporting higher fractionation fees and iso-octane margins that are expected to extend into the first quarter of 2020.”

There are not a lot of energy stocks that I like these days but Keyera’s yield is attractive, and RBC Capital Markets has a $41 target on the share price.

Consult your financial advisor before making any decision.

 

Gordon Pape is Editor and Publisher of the Internet Wealth Builder and Income Investor newsletters. For more information and details on how to subscribe, go to www.buildingwealth.ca/subscribe