Buy for Oil and Yield

09/02/2008 12:00 am EST


Roger Conrad

Chief Analyst/Managing Partner, Capitalist Times

Roger Conrad, editor of Canadian Edge, champions an income trust that's not all about oil.

Pembina Pipeline Income Fund's (TSX: PIF.UN; OTC: PMBIF.PK) shares are up for the year. Management continues to put the pieces in place for further robust growth in cash flow and distributions, a surefire formula for a higher share price down the road. Second-quarter earnings rose 18.6% and cash flow from operations surged 61.6% above [last year's] quarterly totals, riding a 43.6% jump in revenue and a rise in operating income margins.

The trust's midstream and marketing business is designed to leverage the conventional pipe assets by providing a range of services for them and more than doubled revenue, adding up to a 65.9% jump in net operating income. Pembina expects to augment results in the second half with the addition of a new merchant truck terminal services operation and continues to look for similar low-risk expansion opportunities to leverage assets it knows best. Importantly, this division doesn't assume any material commodity price or speculative risk. Rather, it looks for opportunities to generate fees, which it's able to do with relatively little capital cost.

Pembina's biggest endeavor in recent years has been expanding its asset base in the oil sands region. The trust is already the exclusive transportation network operator for the Syncrude partnership, a venture by Super Oils and the world's largest oil sands producer. That makes for exceptionally steady cash flow. Its trading stock is Canadian Oil Sands Trust (TSX: COS.UN; OTC: COSWF).

The first fruit of this growth for shareholders is the additional 8.3% boost in Pembina's distribution, beginning with the September 15th payment. It marks the fourth significant dividend boost since Halloween 2006, a clear sign management intends to keep faith with income investors no matter how it's ultimately organized.

Standard & Poor's recently upgraded the company's rating to BBB+ and senior secured rating to A-. Virtually all capital spending is for asset growth, demonstrating Pembina's ability to exist and even grow on its own resources alone. Another measure of strength: its efforts to clean up a 125-barrel oil spill on one of its pipelines are "not expected to have a material impact" on its financial results.

You won't find many businesses more solid that this one, particularly not with demonstrated growth potential and paying a 9% yield. Pembina is a buy up to $18. (It closed at $TK Friday-Editor.)

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