No Trouble, and Nothing Exciting Either for this Pipeline Stock

PPL - Pembina Pipeline

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 (56% of 2018 operating margin), facilities (29%), and marketing and new ventures (15%). 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 it a key competitive advantage.

Investment Data

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 is comprised 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 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 which are less susceptible to volatility and are also extendible. Almost 86% 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 construction of new facilities from time to time. Jordan Cove LNG, Peace Pipeline expansion, construction of a large petrochemical complex (a part of JV between Pembina and Petrochemical Industries) are a few of its potential mega projects.

Pembina is looking at extending its service offering along the hydrocarbon value chain. The company is connecting its hydrocarbon production to new demand locations with high value markets throughout the world. Strong demand for Pembina’s services across an integrated value chain acts as a strong tailwind for the company and should support top line growth in the future.

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 5.3%. This Canadian Dividend Aristocrat has paid over $7 billion in dividends since its inception and has grown them at 7.5% CAGR over the last three years.

Pembina Pipeline’s current dividend yield is impressive at 4.6%. 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. Pembina’s traditional payout ratio is much lower and reasonable indicating significant room for future dividend increases and cash for growth projects.

The company is also growing through acquisitions. Pembina successfully integrated Veresen; one of the largest acquisitions in the company’s history. This merger has resulted in a bigger size and scale, as well as highly integrated asset base and extended geographic reach.

Pembina is working on $16 billion worth of potential capital projects in the near future. According to the management, the company’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 TSE:ENB, TC Energy TSE:TRP, Inter Pipeline Ltd TSE:IPL, and Keyera Corp TSE:KEY 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.

TickerCompanySectorIndustryScoreQuoteMarketCapPEFPEEPSYieldPayoutRatioPaymentsDividendChowderGraph
ENBEnbridgeEnergyOil & Gas - Midstream64%$49.4199.9633.8419.06$1.465.97%202.19%4$2.9518.98%1
TRPTranscanada PipelinesEnergyOil & Gas - Midstream89%$62.9558.3515.0615.62$4.184.77%71.77%4$3.0011.49%1
PPLPembina PipelineEnergyOil & Gas - Midstream72%$47.6324.2921.2619.94$2.245.04%107.14%12$2.409.20%1
IPLInter Pipeline LtdEnergyOil & Gas - Midstream70%$20.758.3813.5617.92$1.538.24%111.76%12$1.7112.54%1
KEYKeyera CorpEnergyOil & Gas - Midstream83%$31.256.5816.3619.03$1.915.76%94.24%12$1.8012.69%1
ALAAltaGasEnergyOil & Gas - Midstream77%$18.655.1515.6718.76$1.195.15%80.67%12$0.964.97%1
GEIGibson Energy Inc.EnergyOil & Gas - Midstream75%$22.093.2114.4426.44$1.535.98%86.27%4$1.327.01%1

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. Rising demand for LNG worldwide will also act as a strong growth driver for Pembina. A solid fee-based business, leading position in lucrative Canadian oil sands, visible project pipeline and a proven track record of consistent dividend hikes position Pembina favorably for future growth.

The pipeline industry is needed but not really loved. Just pick one of the top 3 to start with. It’s high cash flow business providing high dividend with enough dividend growth to keep up with inflation. These type of holdings are good when you near retirement which is why I am slowly building position in a second pipeline stock with TC Energy TSE:TRP through Computershare.

PPL vs Indexes

DISCLOSURE: Please note that I may have a position in one or many of the holdings listed. For a complete list of my holdings, please see my Dividend Portfolio.

DISCLAIMER: Please note that this blog post represents my opinion and not an advice/recommendation. I am not a financial adviser, I am not qualified to give financial advice. Before you buy any stocks/funds consult with a qualified financial planner. Make your investment decisions at your own risk – see my full disclaimer for more details.
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