Pembina: Pipelines and Profits

10/21/2014 7:00 am EST


David Dittman

Chief Investment Strategist, Australian Edge, Canadian Edge, & Utility Forecaster

Our latest "Income Stock Spotlight" of the month is the quintessential invest-to-grow story, asserts David Dittman in Utility Forecaster.

Pembina Pipeline Corp. (TSX: PPL) (NY: PBA) recently announced agreements to acquire the Vantage pipeline system and Mistral Midstream, Inc.’s interest in the Saskatchewan Ethane Extraction Plant for USD650 million from Riverstone Holdings LLC.

Vantage is an ethane pipeline with total capacity of 60,000 barrels per day (bbl/d) that links production from the Bakken Shale to the Alberta petrochemical market. It gets Pembina a foot in the Bakken, a play that’s ripe for additional infrastructure.

It’s yet another growth platform for a company that continues to add assets while maximizing organic expansion opportunities.

In addition to strategic access to the Bakken for future natural gas liquids opportunities, Vantage, underpinned by a take-or-pay transportation contract, provides long-term, fee-for-service cash flow. Management expects the deal to be accretive to cash flow per share in 2016.

Pembina is also progressing on a propane export terminal. Management recently settled on the Port of Portland, Oregon as the site of the project, providing more visibility ahead of a final investment decision on a potential USD500 million endeavor.

And Pembina also upsized its Phase III expansion with the addition of two new pipelines at a total of CAD435 million, bringing overall estimated cost of the Phase III expansion to CAD2.44 billion.

Pembina reported a 36.7% in increase in second-quarter to CAD1.61 billion, driven by execution on previous expansion opportunities. Operating margin improved by 29.3%, while adjusted cash flow per share was up 20% to CAD0.59. The payout ratio for the period was 50.6%.

Pembina continues to expand its fee-for-service asset base in key producing basins in an efficient manner.

In light of its track record as well as future prospects, we’re raising our buy-under target on the stock. Pembina Pipeline is now a buy under USD50.

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