Is PPL oversold compared to peers?

Pembina Pipeline is a leading energy infrastructure company in North America. The company has a presence in crude oil, natural gas, and natural gas liquids industries across multiple basins and markets throughout Canada and the U.S. Pembina has three divisions, pipelines (~60% of 2019 adjusted EBITDA), facilities (30%), and marketing and new ventures (10%). The company owns a large network of pipelines that transport crude oil, natural gas and natural gas liquids produced primarily in western Canada. It also owns gathering and processing facilities, and oil and natural gas liquids infrastructure and logistics business.

Pembina owns and operates 18,000 km long pipeline and a total capacity of 3 million barrels of oil equivalent per day. The company has 19 gas processing facilities and 6 billion cubic feet per day of net gas processing capacity. The strategic location of Pembina’s assets in rich resource areas provides ample opportunities for future growth. Pembina marked another major milestone celebrating 65 years as a company. The company has grown from a single pipeline to an organization with 2,300 employees and a total enterprise value of ~$37 billion.

Investment Data
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Revenue Growth & Market Exposure

Pembina Pipeline has been serving the energy industry in North America for over 60 years and offers a full spectrum of midstream and marketing services. Its integrated assets, commercial operations, and the hydrocarbon value chain are its strong competitive advantages. The company is known for providing safe, value-added and cost-effective transportation solutions. Its Pipelines division consists of conventional, transmission and oil sands and heavy oil pipeline assets, while its Facilities division includes natural gas processing and NGL fractionation facilities and related infrastructure.

A huge and efficient network of pipelines is the key to success for a midstream energy company. Pembina’s leading position in the Canadian Oil Sands region is also an added advantage. The contracts for conventional pipelines are on a fee-for-service basis and provide better cash flow visibility. Pembina typically enters into long term contracts that are less susceptible to volatility and are also extendible. Almost 85% of its EBITDA is from fees.

Pembina has a fully-integrated value chain for natural gas, NGL, crude oil, and condensate. Its strategic locations via the North American west coast provides wide access to global markets. The company also focuses on the execution of various expansion projects and the construction of new facilities from time to time. Pembina is also looking at extending its service offering along the hydrocarbon value chain. The company continues to benefit from the ongoing growth in its business, both organically and through acquisitions. Results improved as a result of increases in the pipeline and facilities divisions driven by new assets being placed into service, as well as increased terminal and storage revenues. Oil sands business also saw higher revenues from recoveries under flow-through capital arrangements. The company executed agreements for a significant term extension and increase volume commitments at Pembina’s Saturn deep-cut processing facility to ensure safe and cost-effective operations, optimizing its existing assets.

Pembina is best positioned to meet customer demand for integrated services. Its pipelines and facilities divisions are constructing $3 billion of capital projects. Its Prince Rupert Terminal which is currently under construction is expected to go into service in the second half of 2020 and should support the development of an export terminal business.

The company announced the strategic acquisition of Kinder Morgan Canada and the U.S. portion of the Cochin Pipeline. These acquisitions are estimated to provide enhanced integration with Pembina’s existing franchise, extend its value chain and offer clear visibility to creating long-term value for stakeholders. The fourth quarter results were positively impacted by the contribution from new assets acquired in the Kinder acquisition. The company also approved the first stage of the Peace Phase IX expansion, which should allow access to ~100,000 barrels a day of latent downstream capacity. Pembina could quickly and cost-effectively add 300,000 barrels per day of capacity with minimal capital outlay to support additional customer growth.

Dividends

Pembina has a proven history of growing dividend and cash flow per share. It pays monthly dividends to its shareholders and last raised them by 12.5% annually marking the 9th consecutive annual increase. This Canadian Dividend Aristocrat has paid over $8 billion in dividends since its inception and has grown them at 6.3% CAGR over the last five years. Its payout ratio is ~95% currently. Pembina Pipeline’s current dividend yield stands at 15%. The company is targeting to generate 80% of its EBITDA from fee-based contracts and reduce its payout ratio to less than 100% of fee-based distributable cash flow. Its earnings have grown at a rate of 30%+ CAGR in the last three years.

Pembina’s integrated business models supported by long-term contracts and a strong financial position has generated consistent and growing earnings through energy market cycles. The company’s dividends are fully underpinned by fee-based adjusted EBITDA. In 2019, fee-based cash flow comprised almost 85% of adjusted EBITDA for the year. Pembina’s fee-based cash flow more than covered its annual dividend payment. Its dividend continues to be fully funded without any dependency on its commodity exposed business.

The company has a strong pipeline worth $1.2 billion of additional fee-based projects which are expected to enter service in 2020, including the Phase VI expansion of the Peace pipeline system, the first phase of the Prince Rupert Terminal, the height development project as well as Duvernay 3. It also currently has $2.9 billion of projects under construction. With these projects coming online as well as contributions from the Kinder Morgan assets, Pembina expects to generate adjusted EBITDA of ~$3.25 billion to $3.55 billion in 2020. The integration of Kinder Morgan is progressing well. Pembina Pipeline is estimated to realize additional annual adjusted EBITDA of $100 million with only modest capital spending over the next five years. The acquisition of Kinder Morgan was immediately accretive to the cash flows.

According to the management, Pembina’s annual organic growth of $1 to $2 billion is self-funded. A strong pipeline of projects, access to premium markets and a strong financial position should help the company maintain its dividend growth streak in the future.

Competition

Enbridge, TC Energy, Inter Pipeline Ltd, and Keyera Corp are Pembina Pipeline’s leading competition. Enbridge is Canada’s largest natural gas distribution provider while Inter Pipeline is an integrated energy infrastructure company in Canada. Keyera’s predominantly fee-for-service based and integrated business pose strong competition for Pembina Pipeline, while TransCanada Pipeline is a North American infrastructure company, supplying more than 25% of natural gas consumed daily across North America.

TickerKeyTickerCompanySectorIndustryScoreQuoteMarket CapP/EFPEEPSYield RawYieldPayoutRatioPaymentsDividendChowderGrowthRatingIncomeRatingTollboothAmbassadorAchieverAristocratKingCountryGraph
TSE:ENBENBEnbridgeEnergyOil & Gas Midstream0.5741.6984.4343.1243.120.970.07777.773.340243.240.194476Tollbooth - UnregulatedYESYESYESNOCanada1
TSE:TRPTRPTC EnergyEnergyOil & Gas Midstream0.6959.3155.7512.5512.554.720.05465.460.686443.240.125069Tollbooth - UnregulatedNOYESYESNOCanada1
TSE:PPLPPLPembina PipelineEnergyOil & Gas Midstream0.6434.0718.7421.1921.191.610.07407.401.5652122.520.116278Tollbooth - UnregulatedNONOYESNOCanada1
TSE:IPLIPLInter Pipeline LtdEnergyOil & Gas Midstream0.4813.515.8019.7219.720.690.03553.550.6957120.480.064425Tollbooth - UnregulatedNONONONOCanada1
TSE:KEYKEYKeyera CorpEnergyOil & Gas Midstream0.4523.465.1932.5732.570.720.08188.182.6667121.920.144865Tollbooth - UnregulatedNONOYESNOCanada1
TSE:GEIGEIGibson Energy Inc.EnergyOil & Gas Midstream0.4321.493.1422.0922.090.970.06336.331.402141.360.063325Tollbooth - UnregulatedNONONONOCanada1

Bottom Line

As a leading North American energy infrastructure company, Pembina Pipeline is well-positioned for future growth with strategically located assets and increasing demand for services. Pembina is a leader in delivering integrated infrastructure solutions connecting global markets. Its existing assets footprint is poised to benefit from the development of LNG projects located along the North American West Coast. Growing NGL volumes combined with integration and market diversification should drive sustained performance in the future. Pembina’s fee-for-service assets should also continue supporting a growing and sustainable dividend in the future.

Pembina Pipeline has dropped more than its pears and could imply an opportunity if you are bullish on their business strategy. See what the BNN analysts have to say. Comments are mixed. I am sticking to the bigger players with ENB and TRP.

Dividend Adjusted Chart by StockRover.

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