The market crash in the last month has wiped off billions of dollars from investor portfolios. Stocks, including AltaGas (TSX:ALA), have declined over 40% from 52-week highs driven by low crude oil prices and the COVID-19 pandemic.
Investors are worried about lower-than-expected consumer demand in the upcoming months, which can very well drive oil prices lower. So, should investors consider energy companies like AltaGas for their portfolios?
AltaGas is a diversified energy company
AltaGas has three business segments: Midstream, Power, and Utilities. The Midstream business transacts over 1.5 billion cubic feet per day of natural gas. This segment includes natural gas gathering & extraction, NGL (natural gas liquids) extraction, transmission & storage, and NGL marketing.
Its Power business is engaged in the generation and sale of electricity and ancillary services via its facilities in Alberta, California, and North Carolina. The company’s Utilities business serves customers through ownership of its regulated natural gas distribution utilities.
In 2019, the utilities business accounted for 47% of sales, followed by Midstream and Power at 29% and 25%, respectively. AltaGas generated 22.6% of sales from Canada and the rest form the United States.
AltaGas stock is down 39% from 52-week highs
While the iShares S&P/TSX 60 Composite Index is down 23% in the last month, AltaGas shares have fallen 39% from $22.74 to its current price of $13.88. While AltaGas has considerable exposure to the natural gas segment, it generates a majority of revenue from its utilities business, which will result in stable cash flows for the firm given the non-cyclical nature of this industry.
AltaGas’s utilities segment serves over 1.6 million customers, and this business increased sales by a significant 46.8% in 2019 to $2.59 billion. The company has managed to increase sales from $2.55 billion in 2017 to $5.49 billion in 2019. Analysts expect company sales to touch $6.31 billion in 2021.
In 2019, AltaGas was one of the top-performing stocks on the TSX and was up close to 50%. The company successfully managed to execute its business strategy and delivered strong financial and operating results, which were at the top end of management forecasts.
AltaGas completed $2.2 billion in non-core asset sales, which was over its target of between $1.5 billion to $2 billion. This helped it reduce net debt balance by $3 billion and de-leverage balance sheet significantly.
AltaGas ended 2019 with a debt balance of $5.5 billion, which is still high considering its market cap of $3.87 billion. It cut dividend payments in 2018 to fund growth investments, and while another cut is unlikely, an economic downturn might make management think otherwise.
AltaGas suspended its dividend-reinvestment program in January 2020. This has increased the company’s capacity to fund $1 billion in annual growth with cash flows and debt capacity. It has also identified other non-core assets that can be monetized going forward.
What is next for investors?
During the company’s earnings call, AltaGas CEO Randall Crawford stated, “Looking to the future, we are now well positioned as a diversified, low-risk, high-growth energy infrastructure company with ample investment opportunities in our Utilities and Midstream businesses. We enter 2020 with a clear line of sight on a significant portfolio of organic growth opportunities with a strengthened balance sheet and the financial flexibility to execute.”
The sell-off has meant AltaGas is trading at a forward price-to-earnings multiple of 11.2. Analysts covering the stock expect earnings to grow at an annual rate of 17% in the next five years. The stock looks undervalued, especially after accounting for a dividend yield of a juicy 7.6%.
The recent pullback has made AltaGas stock attractive to contrarian investors. AltaGas’s high debt balance might worry investors, but it seems like a solid defensive pick in an uncertain environment.
