AltaGas: Strong Finish To 2020
Summary
- AltaGas has had a troubled past but recent quarters are hitting all the right notes.
- We examine the Q4-2020 results and the 2021 guidance.
- We tell you why we still like this one but are now slightly less bullish.
- I do much more than just articles at Conservative Income Portfolio: Members get access to model portfolios, regular updates, a chat room, and more. Learn More »
Note: All amounts referenced are in Canadian Dollars.
When we last covered AltaGas (OTCPK:ATGFF) we gave it another "buy" rating. Specifically we said,
But that is all behind it and the self-funded model looks appealing, even to skeptical investors. We are reiterating a "buy" here with a price target of $21 in 12 months. This makes for a solid all-round return prospect with a nice monthly dividend stream. Cautious investors can also consider AltaGas Preferred Shares for an income play.
Source: Reiterating Buy On Self-Funded Plan
The stock has done well since then and outperformed the broader indices. But the real divergence has come in its performance vs the TSX Utilities Index (TSX: XIU), where AltaGas has really delivered.
Data by YCharts
With this performance in place and the Q4-2020 results being out, we decided to see if we needed to tweak our thesis.
Q4-2020
AltaGas capped a good year with a strong fourth quarter. Normalized EBITDA approached almost $400 million in Q4 and the whole year delivered adjusted earnings of a $1.42.
Source: Q4-2020 Presentation
While those numbers were good, investors should remember that AltaGas business has a bit of cyclicality and the fourth quarter is supposed to be exceptionally strong. In this light, the numbers were about average. We can see this better when we do a walkthrough the delta from Q4-2019.
Source: Q4-2020 Presentation
Year over year, normalized EBITDA grew less than 1% but that was still higher than our expectations.
Source: Q4-2020 Presentation
Earlier in 2020, we thought that the headwinds of asset sales might be tough to overcome but AltaGas did manage do it.
2021 Guidance
AltaGas surprised the bears again with a very big jump in adjusted EBITDA forecast.
Source: Q4-2020 Presentation
The midpoint of that shows a more than 10% increase over 2020 numbers. Normalized EPS is about the same as 2020. The difference between the two comes from the complexity of accounting for what normalized EPS actually is in the utilities business. Nonetheless the soaring EBITDA is what will provide support for this company as the biggest risk in the past has been their debt to EBITDA metrics. AltaGas also guided for their 2021 capex plans.
Source: Q4-2020 Presentation
At first glance, the $910 million might appear high to some investors in relation to EBITDA guidance. But this is a rapid tempering of the pace at which AltaGas drove in the past. In both 2020 and 2019, gross capex far exceeded this number.
Source: Q4-2020 Presentation
In 2019 AltaGas actually went on selling spree to keep debt to EBITDA numbers from going ballistic. But the capex numbers have moderated to a point that AltaGas has really removed any funding risk from its model. Assuming $1,450 of EBITDA, $270 million of interest expense (2020-$274 million), $270 million of dividends (2020-$268 million) and about $150 million of income taxes, we do get to the capex of $910 million being pretty much internally funded. Yes debt moves up a bit, but debt to EBITDA should move lower in 2021.
Key Risks
AltaGas' utility model is now heavily dependent on its three main jurisdictions of Maryland, Virginia and Washington. In each, AltaGas has some major necessary capex over the next decade. While capital recovery in general is always guaranteed, these rate cases can have several items excluded or not result in a high return on equity. That said, the risk today is remarkably tempered. The very large stimulus bills that have recently passed all but guarantee a strong economic performance in 2021. It is only in weak economic environments that utilities get a lot of push back from the regulatory authorities. That does not appear to be the case for either 2021 or 2022. Investors should remain cognizant of this further down the line though.
AltaGas is also part of the consortium that have been on the receiving end of regulatory delays on the Mountain Valley Pipeline (MVP). MVP keeps getting delayed and there appears no end in sight to this.
Source: Q4-2020 Financials
MVP Southgate has also been delayed as a consequence, but that is a far smaller amount of stranded capital. AltaGas is in a good position overall here though as it has funded what it needs to (overall funding is capped for the company) and the project is small in relation to the company's enterprise value. This might be more of an upside surprise should the project be given a go ahead eventually.
Conclusion
AltaGas will likely not win many fans with its dividend yield.
Data by YCharts
The stock price is now still down, from the incredibly bad acquisition of WGL. This was something we wrote about at the time. Back then we called the purchase multiple (27X normalized earnings) as being so far out of whack with reality, that negative returns were pretty much guaranteed across all timeframes. As we projected, AltaGas was forced to chop the dividend and focus on deleveraging. But, at this point it really has gotten its act together. It likely will never recover the massive value destruction from overpaying for WGL or from selling ultra prime Canadian assets to keep debt levels in check post acquisition. But the company is cheap in relation to its current prospects. We have also not been able to find a single fault in the last 12 months with the execution. We still see 10% total returns for 2021. We are however moving to a slightly less optimistic stance as we are seeing better values elsewhere on the Canadian spectrum.
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.
Are you looking for Real Yields which reduce portfolio volatility?
Conservative Income Portfolio targets the best value stocks with the highest margins of safety. The volatility of these investments is further lowered using the best priced options. Our Cash Secured Put and Covered Call Portfolios are designed to reduce volatility while generating 7-9% yields. We focus on being the house and take the opposite side of the gambler.
Learn more about our method & why it might be right for your portfolio.
This article was written by
Conservative Income Portfolio is designed for investors who want reliable income with the lowest volatility.
High Valuations have distorted the investing landscape and investors are poised for exceptionally low forward returns. Using cash secured puts and covered calls to harvest income off value income stocks is the best way forward. We "lock-in" high yields when volatility is high and capture multiple years of dividends in advance to reach the goal of producing 7-9% yields with the lowest volatility.
Preferred Stock Trader is Comanager of Conservative Income Portfolio and shares research and resources with author. He manages our fixed income side looking for opportunistic investments with 12% plus potential returns.
Analyst’s Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
Seeking Alpha's Disclosure: Past performance is no guarantee of future results. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. Any views or opinions expressed above may not reflect those of Seeking Alpha as a whole. Seeking Alpha is not a licensed securities dealer, broker or US investment adviser or investment bank. Our analysts are third party authors that include both professional investors and individual investors who may not be licensed or certified by any institute or regulatory body.
Recommended For You
Comments (13)
AltaGas (OTCPK:ATGFF) says it has sold its U.S. Transportation and Storage business to an entity owned by Six One Commodities and Vega Energy Partners for C$344M (US$275M).
If they are bleeding CAPEX at a slow but terminal rate, why try? You can only tap ratepayors for so much.
Long term destruction may not be over yet.
Buffett loves horror stories at fire sale prices.
More rate hikes every couple of years until the politicians find more votes telling the UTE no more rate hikes for pipes.
Local citizens utility boards have legions of activist lawyers to bring lawsuits to insure this stays in never never land.The ongoing gnawing expense will continue to drag them ever closer to the abyss of fiscal demise. A bad year like Covid non allowance of shut offs for nonpayment, a bad pipeline ruling and... Oh! Look that's exactly the kind of calamity that's happening now!What else do you need?
An alien landing in Washington D.C.?Regulatory mandated renewable additions?
No strain on Capex being green right?Everyone has pipe replacement projects ongoing in the upper midwest, east and southeast USA. If your utility is close to a hundred years old the pipes are too. Some UTEs replaced pipes as they grew, some delayed the toll until things broke.
The west and southwest weren't settled until many years later, those pipes are not the same.
It's whether you planned for them or inherited the mess that make them scalable to complete.
Most UTEs will give a tally of where they stand.Imagine replacing a mile of nat gas line on Pennsylvania AVE in D.C.
You don't have the security clearance to read the scope of the project.
Find labor that are clearance qualified to be there, or added cost for 17 FED agencies to stop by and shut down your work every 20 feet or so just to double check some piss ants calculation to something else you don't know about buried nearby.
Daily briefings, onsite surveillance, Christ what all else they can do to slow you down.This is a permenant impairment that's not improving any time soon.
Are they exceeding 4% completion per year?
It will never be complete.If it is getting done in one state but not the others it won't take long for regulatory remediation on a mandatory scale.Hope they don't vote for statehood in D.C.
If they become a state we all will pay for this entrenchment. Whether you invest or not.
