One of the companies which may be able to compete for “most beaten up firms of the past two years” is Altagas Ltd. (TSX:ALA), a diversified Canadian energy producer which has seen its share price languish near 52-week lows in recent weeks.
The headwinds for Altagas are real, and investors are increasingly pricing in higher risk premia for specific near-term trends which have hit companies such as Altagas harder than many of its peers due to the sensitivity of the company to levers such as interest rates.
Following an aggressive and large acquisition of U.S.-based WGL Holdings, the company has committed to selling off assets and issuing debt to pay for this purchase, a move which in hindsight may prove to have been the right deal at the wrong time for the firm.
As interest rates rise, the cost of borrowing for such transactions has the potential to negatively impact the future expected cash flows from the business combination.
Additionally, increased leverage at this point in time for most firms in the oil & gas sector has been viewed as relatively toxic, with most companies choosing to reduce debt given the fact that Canadian companies are nearly twice as levered as comparable U.S. firms at this point in time, according to at least one analyst covering North American leverage ratios.
That said, Altagas’ price to fair value estimate (my estimate) shows significant long-term upside, assuming the company is able to execute its asset sales and limit its debt exposure for the next few years.
With oil prices stabilizing and an increasing percentage of the company’s revenue coming from utilities, I expect to see more stable cash flow generation in the years to come, boosting Altagas’ attractiveness for investors.
Invest wisely, my friends.
