On Wednesday, JPMorgan (NYSE:JPM) downgraded AltaGas (TSX:ALA) Canada Inc. (ACI:CN) (OTC: AGAAF) stock to Neutral from Overweight, albeit with a slight increase in the price target to Cdn$37.00 from the previous Cdn$36.00. The downgrade comes after a period of recent stock appreciation and considerations of the company's significant project development cycle, which is juxtaposed with a stretched balance sheet that has limited flexibility according to credit agencies.
The firm noted that AltaGas Canada's planned capital program for 2024 has expanded to $1.3 billion, following the Final Investment Decision (FID) on the REEF project earlier this year. This increase in planned expenditure has coincided with a shift to negative outlooks from both S&P and Fitch, raising concerns over potential balance sheet stress that could result from delays or cost overruns in midstream projects. Specifically, the REEF project's net expenditure to AltaGas is estimated at $675 million, with a year-end 2026 in-service date (ISD).
On the regulatory front, AltaGas faces potential challenges in Maryland (MD), where an unexpected switch to a one-year rate plan has replaced the Multi-Year Plan (MYP) initially requested by Pepco. This change suggests possible regulatory obstacles ahead, especially in light of Maryland's progressive policies on de-carbonization. The analyst also indicated that the potential sale of the Mountain Valley Pipeline (MVP) could be complicated by differing objectives and strategies among joint venture owners, potentially extending the timeline for AltaGas to reduce its leverage.
In summary, the analyst's decision to downgrade AltaGas Canada to Neutral reflects a view that the total return and risk/reward balance are now more even among small to mid-cap companies in the sector. The analyst has considered the company's heavy investment commitments, the negative credit outlooks, and the uncertain regulatory environment in their assessment.
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