Altagas Hikes: Stock Dives - Why The Market Remains Spooked
Summary
- Altagas reported Q4-2017 numbers.
- The stock dropped 10% in the next 2 days.
- We review the numbers and what might have spooked the market.
It is a hostile market for yield. We have no doubt about this. Stocks are seeing prices that were previously thought of as impossible. So when Altagas (OTCPK:ATGFF) joined the ranks of "The Walking Red" we were not too surprised. We did however examine the financials to figure out what made the market finally realize that this needed to go much lower.
Overall numbers looked fine
Normalized EBITDA grew 14%, funds from operations (FFO) moved up by 11%. However on a per share basis, FFO actually declined slightly in Q4-2017 versus Q3-2017. The culprit of course was the share count which stood about 5% higher versus Q4-2016. Altagas was also hurt by higher administrative expenses related to the WGL holdings (NYSE:WGL) acquisition.
Cash flow
We were pleasantly surprised to see Altagas spend less than in 2016 and actually produce free cash flow from the combination of operating and investing activities.
Source: Altagas 2017 10-K
That, however still left very little to pay the dividends and Altagas issued significant amounts of common and preferred shares (unassociated with the WGL transaction). Still, this is par for the course for Altagas and in any other circumstances would not spook the market.
Spook-1
Altagas expects to acquire WGL mid-2018 and spend about $1-$1.3 billion CAD in capital expenditures. Considering WGL's stand alone run-rate of about $125 million USD a quarter, the two entities will spend about $1.3-$1.6 billion CAD in 2018. Based on current run rates, the two entities will struggle to produce even $1 billion CAD in operating cash flow. In the last 12 months two entities actually produced close to $800 million CAD in operating cash flow. That is based on WGL 10-K (page 55), and the above 2017 Altagas 10-K. Depending on the exact timing of the close, the two entities will also pay out about to $550 million CAD in dividends.
Source: Author's estimates and calculations
So at the midpoint of capex guidance, Altagas will have to fund over $1.2 Billion in capex ($1.45B+0.55B-0.8B). Some will come via Dividend Reinvestment Program (DRIP) for sure but it is one tall order in today's market. This was likely higher than the market's estimates and was further worsened by the downgrading of the 2018 EBITDA outlook by the company.
Spook-2
Altagas withdrew its California Power assets from the market.
Management has presently identified a total of over $4.0 billion of assets from the AltaGas Gas, Power and Utilities business segments in respect of which it is evaluating various options for monetization that could include the sale of either minority and/or controlling interests. Management expects to realize over $2 billion from its asset sale process in 2018. With the present optionality available to AltaGas and in light of a number of factors including recent developments in the California Resource Adequacy markets, AltaGas has discontinued the previously announced sale process of its California power assets.AltaGas will instead continue to pursue other structuring and commercial opportunities to unlock the value of the California assets. Additional financing steps could include offerings of senior debt, hybrid securities, and equity-linked securities (including preferred shares), subject to prevailing market conditions.
Basically saying that there was not a good market for those. Of course that would mean other assets, perhaps ones that Altagas wanted to keep for long would have to be sold. The $2 billion in sales will improve Altagas' net debt position by just $800 million as spending and dividends will be running rampant.
Conclusion
We had previously calculated a fair value of $18.25 CAD for Altagas on August 30, 2017 and the stock is certainly closer to that than when we wrote that article. However, and this is key, the decline has occurred pretty much everywhere in the high yield sector and because of that Altagas remains the most expensive in the sector.
InterPipeline (OTCPK:IPPLF), Enbridge (ENB), Transcanada (TRP) and Pembina (PBA) have all underperformed the broader indices and struggled in the current rising interest rate environment. In that environment, a company with the highest debt to EBITDA and one with the highest maintenance capex to EBITDA should trade at a material discount to the rest. Altagas still does not. Further, Altagas continues to reiterate EBITDA and normalized funds from operations guidance, both of which we consider slightly worse than useless in this company's case. We would like guidance on adjusted funds from operations (AFFO) and we suspect we will not get that as WGL's spending on pipeline replacement exceeds it FFO.
That said, some of the major risks are now being priced into the stock and the stock is approaching fair value. We also looked at some additional indicators that we shared in our newly developed Marketplace partnership, The Wheel Of Fortune, that we think will significantly impact stock market leadership going forward. Those indicators also have influenced our overall stance here. Color us less bearish at this point.
Disclaimer: Please note that this is not financial advice. It may seem like it, sound like it, but surprisingly, it is not. Investors are expected to do their own due diligence and consult with a professional who knows their objectives and constraints.
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