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Pembina Pipeline: A Dividend Stock With Massive Growth Opportunities

Published 2017-12-21, 12:48 a/m
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Pembina Pipeline Corporation (TSX:PPL) shares have performed quite well over the past 10 years with total shareholder returns averaging 18% annually

SmallCapPower | December 20, 2017: Pembina Pipeline Corp (TO:PPL) is a leading transportation and midstream service provider that has been serving North America’s energy industry for over 60 years. Pembina Pipeline owns and operates an integrated system of pipelines that transport various hydrocarbon liquids, including conventional and synthetic crude oil, heavy oil and oil sands products, condensate and natural gas liquids produced in Western Canada and ethane produced in North Dakota. The Company also owns and operates gas-gathering and processing facilities and an oil and NGL infrastructure and logistics business. With facilities strategically located in Western Canada and in NGL markets in Eastern Canada and the U.S., Pembina Pipeline also offers a full spectrum of midstream and marketing services that spans across its operations.

Investment Highlights

  • Recent acquisition of Canadian midstream company Veresen offers significant growth opportunities
  • Strong history of growing dividends
  • Proven long-term track record of shareholder value creation

Recent acquisition of Canadian midstream company Veresen offers significant growth opportunities

The combined company will feature an asset base supported by long-life, economic hydrocarbon reserves concentrated in some of the most prolific resource plays in North America. The diversified portfolio will include crude oil, liquids and natural gas pipelines, terminal, storage and midstream operations, gas gathering and processing facilities as well as fractionation facilities. The combined company will drive significant shareholder value through the following

  • The combined asset base is highly integrated across the value chain and extends the geographical reach of the combined company while enhancing its customer service offering.
  • The combined company will benefit from diversification across basins and products, as well as customers and currency
  • The cash flows of the combined entity will be over 85% fee-for-service weighted, ensuring the maintenance of a strong balance sheet
  • The Transaction creates an organization of meaningful scale able to pursue larger growth projects

EV BB

Strong history of growing Pembina’s dividends

Pembina Pipeline currently offers a 5% dividend yield, which is comparable to industry peers (Enbridge – 5%, TransCanada Corp. 4%). The Company has grown its dividend at a reasonable rate, 4.9% CAGR for the last 10 years. Management expects future dividend increases in the high-single digits.

Dividend Growth Supported By Grwing Cash Flow

Proven long-term track record of shareholder value creation

Pembina Pipeline has performed quite well over the past 10 years with total shareholder returns of 18% annually on average, with a 440% total return since 2006.

Proven Long-term Track Record

Financial Analysis – Pembina Pipeline delivered strong financial and operational results in the third quarter of 2017

Revenue in the third quarter increased by 7.3% to $1,041 million, driven by higher sales volumes in the Midstream business, as well as improvements in commodity prices in the current year and increased storage opportunities in the midstream business in the first half of 2017, as compared to the same period in the prior year.

Net revenue (revenue less cost of goods sold including product purchases) came in at $532 million, driven by higher revenue and sales volumes primarily as a result of new assets being placed into service across all of the Company’s businesses.

Operating margin increased by 27% to $403 million, driven by stronger performance from the Conventional Pipelines, Gas Services and Midstream businesses driven by new assets placed into service and increased revenue and sales volumes.

Earnings came in at $107 million, lower than the $120 million of the prior-year period. Higher gross profit was partially offset by higher general and administrative costs, net finance costs and other expenses.

Adjusted EBITDA increased by 27% to $365 million, due primarily to higher operating margin in the respective periods, as discussed above.

Operating Margins

Conclusion

Pembina Pipeline’s high dividend yield profile along with significant growth opportunities makes the Company an attractive stock for growth investors. The Company’s short-term growth prospects look attractive and the acquisition of Veresen will further boost its prospects. With a dividend yield approaching 5% (and a monthly dividend payout), a low-risk fee-based business model with predictable cash flows, and the potential for long-term dividend and earnings growth, this stock has all the intrinsic qualities to excel going forward.

Disclosure: Neither the author nor any of the principals at SmallCapPower, or their family members, own shares in the company mentioned above.

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