Pembina: Profit Pipeline

03/30/2016 7:00 am EST


Roger Conrad

Chief Analyst/Managing Partner, Capitalist Times

Despite industry headwinds and the stock’s underperformance, this recommended midstream energy firm has continued to deliver strong results, observes Roger Conrad, editor of Conrad’s Utility Investor.

The collapse in energy prices over the past year and the slide in the Canadian dollar have weighed on the US dollar as well as shares of Pembina Pipeline (PBA).

Cost-cutting and record throughput volumes on the company’s pipelines and other infrastructure boosted margins and fueled a 53 percent increase in cash flow from year-ago levels.

Much of this upside came from the completion of $1 billion worth of new projects last year -- assets that boosted the firm’s fee-based revenue to 68 percent of total sales.

The oil sands business should remain relatively stable, given the low decline rates associated with these assets and take-or-pay agreements with large, investment-grade producers.

And the remainder of Pembina Pipeline’s business segments focuses on niche markets where volume should hold up reasonably well.

The company continues to monitor its counterparties for signs of stress, but major cracks have yet to appear.

Reduced upstream spending will almost certainly weigh on Pembina Pipeline’s intermediate-term growth prospects, but output from Canada’s oil sands doesn’t feature the steep decline rates associated with US shale plays.

We also like Pembina Pipeline’s lack of debt maturities until 2018 and relatively low cost of debt capital relative to its peers.

The next real test of Pembina Pipeline’s health will come in early May, when the board usually approves a dividend hike. Another 5 percent increase in the quarterly payout would signal that the firm remains in good health.

Pembina Pipeline rates a buy up to $42 per share for investors who don’t own the stock already.

Subscribe to Conrad’s Utility Investor here…Meet Roger Conrad in Las Vegas at the upcoming MoneyShow, May 9-12. Roger will be discussing the winners and losers in a new era of lower energy prices. To register, click here.

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