Disciplined Growth and Market Access to Take Center Stage. 

As we wrap-up 2023 and move into the new year, we continue to view energy infrastructure names as well-situated for the current environment given commodity and interest rate insulation, discretionary growth flexibility and benefactors of upcoming fundamental catalysts. Capital allocation remains a focal point for many investors and responding to dynamic market conditions to strike the right balance between deleveraging, growth, share repurchases and dividends will be crucial for success in 2024. With respect to growth, we expect value to be attributed to discretionary spending in the volatile interest rate environment, focusing on high-return, low-capital projects that enhance existing market exposure. Despite recent commodity headwinds, our general cash flow expectations for 2024 are increasing y/y as we continue to expect tailwinds for volumes and upstream activity with growing access to premium markets. We are looking to names like ALA, GEI and TA as names that are well positioned in 2024 with unique market exposure, valuation upside and capital program flexibility.  Highlights:  

Growth Capital Considerations
Competition for capital was tight in 2023 and that trend could continue into 2024 in an elevated rate environment. As a result, names have been favoured taking a more disciplined and selective approach to growth as opposed to robust spending programs. However, we continue to see value in energy infrastructure names that have been able to grow through projects and M&A that add high-value contracted cash flows, underpinned through the long-term. A number of names are also focused on debottlenecking initiatives or brownfield growth that are typically associated with smaller price tags and higher return metrics; which would enhance current positioning and market access for midstream customers.   

Returns to Shareholders
Dividends and buybacks remain a primary consideration for the space and should help set names apart. While there are a number of yields in the space offering a sizable premium to traditional fixed income investments like the 10-year government of Canada bond, we continue to view names with underpinned distributable cash flow growth and healthy balance sheets as best positioned for future increases and inflation protection. Share repurchases remain more discretionary, but this has been a lever pulled by names like SES, GEI, PPL, TA, and SPB in 2023.  

Estimate Revisions
With this update, we have largely left our estimates, price targets and ratings unchanged as we previously baked in our current macro, cash flow, and management’s announced guidance into recent individual updates. The only estimate changes with this update capture KEY’s upward revised marketing segment guidance and capital allocation plans.