2 buys and 1 ‘wait-and-see’

Here are two high-yielding western Canadian oil and gas stocks with sustainable dividends and a royalty trust we’ve become cautious on.

Keyera Corp. (TSX—KEY)  

Here are two high-yielding oil and gas pipeline/midstream stocks and a business trust that pay handsome dividends to their shareholders

Among Canadian infrastructure stocks, pipeline and midstream issues have lagged those in other sub-sectors such as the regulated utilities. Low oil prices have increased the potential for bankruptcies among oil and gas companies. This, in turn, could lead to reduced volumes for pipeline and midstream companies.

Consequently, Keyera’s share price is now down 54 per cent from its high of $36.57 in February. Yet we see significant long-term recovery potential for the shares in the event of a rebound in oil prices and greater clarity concerning the company’s spending plans.

Of particular concern is the status of KAPS, a natural gas liquids and condensate system that is intended to transport Montney and Duvernay production in Northwestern Alberta to Fort Saskatchewan. It’s expected to be commissioned in early 2022. With the capital investment of $250 million for KAPS expected to start in the second half of this year, Keyera will be monitoring market conditions and the needs of its customers to determine whether a change in plans will be necessary.

It may be better to defer the project for a year or so. That’s especially the case because Keyera expects to fund this year’s capital plan from its dividend reinvestment program, or DRIP. But with a much lower share price, that would lead to accelerated share dilution. A deferral of KAPS, though, would give the company the flexibility to suspend the DRIP.

While Keyera’s DRIP may be at risk, its dividend appears sustainable. This year distributable cash flow is expected to be $3.40 a share, making the dividend payout ratio a reasonable 56 per cent. The dividend yields 11.4 per cent. Buy if you can accept a higher level of risk.

Pembina Pipeline Corporation (TSX—PPL)

In response to the COVID-19 pandemic and the recent significant decline in global energy prices, Pembina has deferred some of its previously announced expansion projects. These measures will reduce the company’s previously announced capital budget by $900 million to $1.1 billion, or about 40 to 50 per cent. The reduction will be directed toward improving its financial position.

Pembina Pipeline is a leading North American transportation and midstream service provider. The company owns an integrated system of pipelines that transport various hydrocarbon liquids and natural gas products produced primarily in western Canada. It also owns gas gathering and processing facilities, as well as an oil and gas liquids infrastructure and logistics business.

The company has just come off of a strong year in which it delivered record results. For the year ended Dec. 31, 2019, Pembina’s adjusted cash flow from operations was $2.23 billion, or $4.36 a share, compared with $2.15 billion, or $4.27 a share, in 2018. The increase was primarily due to new assets placed into service, new accounting practices and the contribution from new assets acquired in the Kinder Morgan acquisition of 2019.

Pembina says its dividend is more than covered by its fee-based cash flows. That means it doesn’t rely on the direct commodity price exposed portion of its business to support the dividend.

Nonetheless, after increasing its dividend by one cent a share in January, Pembina says it will not increase the dividend further this year. This, along with the company’s capital deferrals, has generated some confidence in the shares, as they’ve recovered just over 61 per cent from their March low, after tumbling nearly 70 per cent from their February high.

Pembina’s cash flow per share is expected to decline to $4.30 a share in 2020. The stock trades at 6.2 times that estimate. Its annual dividend of $2.52 a share, which we think is sustainable, yields 9.4 per cent.

Pembina is a buy for long-term growth and income.

Alaris Royalty Corp. (TSX—AD)

Alaris declared its monthly dividend of $0.1375 a share as usual in March. However, the company also approved changing the dividend payments from monthly to quarterly, with the next dividend expected to be declared in June, which would cover dividends for the second quarter. That’s because management feels that over the next couple of months it will have a better understanding of the impact the current economic situation will have on its business and it will base its dividend for the second quarter on those findings.

Alaris Royalty Corp. provides alternative financing for a diversified group of private businesses, or “partners”, in exchange for royalties or distributions from the partners, with the main objective of generating stable and predictable cash flow for dividend payments to its shareholders.

As of mid-March, there had been no interruptions to cash flow streams and all expected distribution payments for the month had been paid. But by that time some of Alaris’ partners were already experiencing business disruptions, while others have probably experienced interruptions since. This will lead to reduced second-quarter distributions for the company. The full extent of the financial impact of these interruptions on the company, of course, cannot be determined at this time.

But management believes the defensive nature of its portfolio and its strong balance sheet will let it come out of this period in a position to take advantage of opportunities that will exist. Alaris has an active pipeline of deals that it was engaged in before the current crisis that it expects to come to fruition when the pandemic has been dealt with and its impacts are known.

Despite this, we’ve become cautious on Alaris and we would prefer to wait and see how the impact of the coronavirus will play out for the company and its current dividend payments. Alaris Royalty is now a hold.

This is an edited version of an article that was originally published for subscribers in the May 1, 2020, issue of Money Reporter. You can profit from the award-winning advice subscribers receive regularly in Money Reporter.

Money Reporter, MPL Communications Inc.
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