Why AltaGas (TSX:ALA) Could Be the Best Canadian Stock to Buy for 2020

AltaGas Ltd (TSX:ALA) has had an exceptional 2019 and with the impressive work it’s done there is no reason it can’t continue this pace of growth in 2020.

| More on:

After roughly five years with a declining share price, that began at the peak of 2014 and bottomed in early 2019, AltaGas Ltd (TSX:ALA) has finally turned the corner and the shares have begun to recover.

At a share price of roughly $20, it now trades just slightly off its 52-week high, and the stock has a ton of momentum going forward.

A better business plan going forward coupled with exciting growth opportunities that have come online and a stronger balance sheet has made AltaGas a top buy and investors have noticed, but can it continue to outperform?

Its biggest growth opportunity, the Ridley Island Propane Export Terminal (RIPET), came online early in the second quarter of 2019 and is already seeing volumes of roughly 40,000 barrels per day (bbl/d).

In the third quarter alone, RIPET already contributed $37 million in EBITDA to AltaGas’ business.

The RIPET has been a major project not only for AltaGas, but also for the entire upstream industry it serves, as it gives more takeaway capacity to foreign markets for our domestic product, which is what upstream producers in Western Canada have needed so badly for so long.

By September 30, AltaGas had sold off roughly $2.2 billion of non-core asset sales, exceeding its $1.5 billion to $2 billion goal it set for itself. This was an important step to help delever the balance sheet without disrupting its core operations that it’s been so focused on growing and improving.

It’s also been important to reduce its debt in order to maintain its investment grade credit rating.

AltaGas estimates that by year end it will have reduced its net debt by roughly $3 billion, as it has already reduced it by $2.4 billion as of the end of the third quarter.

The company has reduced all that debt at the same time that it was able to fund roughly $1.35 billion in expansion projects in both its midstream and utilities segments.

It still expects to earn roughly $1.2 billion to $1.3 billion in earnings before interest, taxes, depreciation and amortization (EBITDA) this year, as well as funds from operations (FFO) of roughly $850 million to $950 million.

The $3 billion in net debt reduction from 2018’s year-end net debt of roughly $10.1 billion will leave AltaGas with net debt of roughly $7.1 billion at the end of 2019.

Considering the company is estimating at least $1.2 billion in EBITDA for 2019, its year end net debt to EBITDA ratio should be roughly 5.9 times, which is still high, but much better than 2018’s year-end net debt to EBITDA of 10.1 times.

Going forward, its main commitment in 2020 is to continue to unlock the growth potential of its assets, allowing it to grow its operations and consequently its EBITDA without taking on significant debt.

On the midstream side, it plans to increase gas processing volumes as well as increase volumes to RIPET, which should bring considerable growth.

On the utilities side, it wants to grow its rate base and improve its returns through better efficiency and lower costs. It’s also expecting the completion of the Marquette Connector Pipeline in the fourth quarter of 2019, which should help its business into 2020.

The pipeline, which will add a second natural gas transmission pipeline running to Michigan, will have a capacity of roughly 144 million cubic feet per day.

This is crucial given that the only other pipeline is more than 50 years old and is already at capacity and will bring substantial potential to AltaGas’ utility business.

All in all, it’s been a good year for AltaGas thus far, strengthening both its operations and its financials. It continues to target more of the same in 2020. Given its execution on its plans in 2019, I don’t see a reason why it can’t happen.

Investors should expect to see its stock continue to rise into next year, as the market searches for more utilities and midstream exposure, while also having more faith in AltaGas itself now that it has significantly reduced its leverage ratios.

It’s one of the top stocks in its space, so look for AltaGas to be a top performer again in 2020.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium service or advisor. We’re Motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer, so we sometimes publish articles that may not be in line with recommendations, rankings or other content.

Fool contributor Daniel Da Costa has no position in any of the stocks mentioned. The Motley Fool recommends ALTAGAS LTD. AltaGas is a recommendation of Stock Advisor Canada.

More on Dividend Stocks

analyze data
Dividend Stocks

Here’s Why the Average TFSA for Canadians Aged 41 Isn’t Enough

The average TFSA simply isn't enough for most Canadians in their early 40s. Here's how to catch up.

Read more »

cloud computing
Dividend Stocks

Insurance Showdown: Better Buy, Great-West Life or Manulife Stock?

GWO stock and MFC stock are two of the top names in insurance, but which holds the better outlook?

Read more »

concept of real estate evaluation
Dividend Stocks

How to Earn a TFSA Paycheque Every Month and Pay No Taxes on It

Canadian REITs can turn your TFSA into a monthly paycheque machine for life. Here's how Morguard North American Residential REIT…

Read more »

A plant grows from coins.
Dividend Stocks

The Smartest Dividend-Growth Stocks to Buy With $1,000 Right Now

New dividend-growth investors should consider CN Rail (TSX:CNR) stock and another top play if they're looking to build wealth over…

Read more »

Dividend Stocks

The 3 Top Canadian Stocks to Buy With $1,000 Right Now

If you want consistent income, look to consistent dividend payers. These three stocks are some of the best in the…

Read more »

A worker gives a business presentation.
Dividend Stocks

Want a 6% Average Yield? 3 TSX Stocks to Buy Today

These stocks pay good dividends that should continue to grow.

Read more »

chart reflected in eyeglass lenses
Dividend Stocks

Is Alimentation Couche-Tard Stock a Buy for its 0.9% Dividend Yield?

Couche-Tard stock's small yield is not enticing, but its growth potential could be a wealth creator.

Read more »

Hourglass and stock price chart
Dividend Stocks

5.2% Dividend Yield! I’m Buying This TSX Stock and Holding for Decades!

With its 5.2% dividend yield, Toronto-Dominion Bank (TSX:TD) is a stock I'm eagerly buying.

Read more »