At a time when the energy sector is licking its wounds and hunkering down, one company is defying the trend. Keyera Corp. has seen its share price rise 30 per cent since its December low, and analysts are expecting it to go even higher in the coming weeks.
How is this midstream energy firm doing it? For starters, movements in the oil price do not significantly affect its business. Keyera is primarily in the natural gas and natural gas liquids (NGL) business, providing such services as gathering, processing, fractionation, storage, transportation, and marketing. It does not do any exploration or production.
When the oil market was collapsing in mid-December, the price of the stock briefly fell below $70 ($35 post-split, the shares have since split two for one). At the time, I wrote that the sell-off was overdone – it was a case of the baby being thrown out with the bathwater as investors panicked and dumped any stock associated with the word "energy".
As of afternoon trading on April 22, Keyera's price was back up to $44.70, and, five days earlier, CIBC World Markets analyst David Noseworthy had raised his target price to $47.75.
The company, which has been on the recommended list of my Income Investor newsletter since 2004, is well managed and aggressive. It recently announced a joint venture with Kinder Morgan to build a new oil storage terminal with an initial capacity of 4.8 million barrels on its property near Edmonton. Oil storage capacity has become a big concern recently so the timing of the announcement was fortuitous, and the share price jumped on the news.
Keyera's share of the cost will be $330-million. The initial stage will include 12 storage tanks but there will be additional capacity to build another 1.8 million barrels of storage space if required. The terminal will be connected via pipeline to Kinder Morgan's existing Edmonton storage terminals and will provide customers with access to all crude oil streams handled by Kinder Morgan. Users will be able to deliver products to end markets using multiple delivery options, including but not limited to major pipelines and nearby rail terminals operated by Keyera and Kinder Morgan. Kinder Morgan will oversee construction of the project and operate the terminal once it is in service. The first tanks should be operational in the second half of 2017.
Another reason for Keyera's strength is its strong financial position. The company reported record 2014 earnings of $230-million ($2.80 per share), up 56 per cent from $147-million ($1.87 per share) in 2013. Distributable cash flow was $389-million ($4.73 per share) in 2014, which was 35 per cent higher than the $288-million ($3.68 per share) recorded in 2013. Keyera's payout ratio was 53 per cent in 2014 compared to 61 per cent in the prior year.
Looking ahead, CEO David Smith acknowledged that the industry is going through "a challenging time" but said he does not expect any severe negative impact on Keyera, at least in the short term. "In the near term, we do not expect Keyera's throughput volumes to be materially affected, and our cash flows are largely driven by fee-for-service arrangements," he said. "Keyera's business will continue to benefit from the broad diversification of our facilities, services, customers, revenue streams, and growth opportunities."
To back up its optimism about the future, the company announced a dividend increase of 7 per cent. How many energy firms are doing that these days? The new rate, which became effective in March, is 23 cents per month ($2.76 annually), for a yield of 3.1 per cent. The company also announced a two-for-one share split; the shares began trading on a post-split price basis on April 6.
The dividend increase and share split are symptomatic of the next reason the stock has done so well over the years. This company takes care of its investors and shares its success with them.
The only cloud on the horizon is the company's large amount of debt, which stood at $1.16-billion at year-end. That was up from $770-million at the end of 2013. Although the company has strong positive cash flow and access to additional credit, there is speculation we could see a new stock issue this year to raise capital. That could temporarily depress the share price, creating a buying opportunity.
Talk to your financial adviser before taking a position and remember that past results are no guarantee of future performance.