CALGARY – A better-than-expected acquisition has turned AltaGas Ltd. into that rare Calgary-based publicly traded company — a stock market darling, at least in the short term.
Shares in AltaGas Ltd. jumped 7 per cent, or $1.08 each, to $17.53 per share at one stage on Monday as the market continued to digest the $715-million deal it struck last week with Japan’s Idemitsu Kosan Co., Ltd. for a majority stake in Petrogas Energy Corp.
The moves defy much of the negative sentiment in the Calgary oilpatch, where many energy sector and midstream companies are continuing to languish. The S&P/TSX Capped Energy Index closed down just under 0.6 per cent on Monday.
A deal between the two companies was expected as AltaGas announced on Jan. 2 that it had an option to buy the stake in Petrogras, a Calgary-based midstream company with a liquid petroleum gas (LPG) export terminal in Washington state. Analysts across the board increased their price targets on AltaGas as trading opened Monday morning as the metrics and the size of the deal, were better than many expected for AltaGas.
The deal gives AltaGas 74 per cent of privately held Petrogas, which owns the Ferndale LPG export facility in state of Washington, natural gas storage terminals and 6,000 railway cars for transporting commodities in its midstream business.
Monday’s share price gains were likely partly the result of “the positive view of all the analysts and a bunch of headlines hitting the tape this morning,” Raymond James analyst David Quezada said in an interview, noting that every analyst covering the stock had increased their price target on the stock.
Quezada increased his price target on the company by 50 cents per share to $22.50 each in a Monday research note. Other analysts increased their price targets by larger values, including at BMO Capital Markets which now expects the company’s shares to reach $23 each, up from a previous price target of $21 per share.
“Even though they funded (the deal) with debt, they didn’t actually see their net debt to EBIDTA increase. In fact, it went down, so that was surprising,” Quezada said.
Indeed, the transaction is credit neutral, DBRS Morningstar credit ratings analysts wrote in a Monday research note. The firm expects “the transaction to be modestly accretive to consolidated credit metrics prior to the planned asset monetization in 2021.”
But Quezada said the company’s share price performance is a recent improvement. AltaGas — which he considers to be part-utility and part midstream business — has underperformed its peers in both the utilities and midstream sectors in recent months.
AltaGas’s deal for a controlling stake in Petrogas will significantly expand the company’s midstream asset base, which the company has outlined as a growth area.
“This acquisition is consistent with our global export strategy, growing midstream operations and corporate focus on building a diversified, low-risk, high-growth utilities and midstream business,” AltaGas president and CEO Randy Crawford said in a release announcing the deal.
The company did not provide a response by deadline to questions about the current market for LPG exports to Asia on Monday. The market has been challenged this year as the coronavirus outbreak forced many countries into lockdown but demand for imported fuels in Asian countries has improved in recent months and analysts say the timing of the Petrogas deal is ideal for AltaGas.
AltaGas currently owns and is expanding its own LPG export facility on Ridley Island near Prince Rupert, B.C. The acquisition of the Ferndale LPG export facility is expected to dramatically bolster the company’s share of the market selling fuels derived from North American natural gas to Asian markets.
ATB Capital Markets research shows that spot prices for LNG in Japan have risen sharply since the market crashed earlier this year, and trading at US$4.39 per thousand cubic feet.
“The acquisition also marks an important move to expand its unique competitive position of LPG exports on the West Coast,” BMO Capital Markets analyst Ben Pham said, noting there’s a multiple year “growth trajectory” for global propane demand and AltaGas’s “enhanced footprint is well positioned to benefit from increased business activity and volume expansion.”
Financial Post
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