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Pembina Building Spree Spurs Best Pipe Returns

March 27, 2013

Pembina Building Spree Spurs Best Pipe Returns

Canadian pipeline stocks are hovering near record highs amid attempts to block new conduits. Photographer: Norm Betts/Bloomberg

Pembina Pipeline Corp. (PPL) has more room to rise after its expansion into pricier fuels such as propane and ethane helped it generate the best total return among its Canadian peers this year.

Pembina has advanced 14 percent, including dividends, this year, top among the country’s six largest pipeline operators, according to data compiled by Bloomberg. It sports the highest dividend yield in the group at 5.1 percent, as it advances three projects valued at C$1 billion ($984 million) to extract, process and transport petroleum liquids across Alberta.

The Calgary-based company is taking advantage of a surge in demand from energy producers drilling for liquids such as ethane, butane and propane after a North American glut pushed natural gas prices to a decade low last year. Pembina is getting a lift as it builds on its C$3.2 billion purchase of Provident Energy Ltd., Leon Frazer & Associates Inc. said.

“As the business grows and as they’re able to increase their dividend, there’s certainly room for the stock price to increase,” Ryan Bushell, who manages C$900 million at Toronto- based Leon Frazier including shares in Pembina, said in a phone interview. “The liquids business is booming.”

Highest Yield

Pembina’s 14 percent total return compares with 10 percent for Canada’s largest pipeline company Enbridge Inc. (ENB), and 3 percent for Inter Pipeline Fund (IPL-U), the sixth-biggest, according to Bloomberg data. The company’s dividend is forecast to continue leading its peers in the next 12 months at 5.3 percent, the Bloomberg estimates show.

Pembina rose 1.2 percent to C$31.95 in Toronto, a record closing price. It is projected to climb 7.7 percent to C$34.41 in 12 months, according to the average of 11 analysts’ estimates compiled by Bloomberg. Profit rose 36 percent to C$225 million in 2012 as Pembina doubled revenues following the purchase of Provident.

The company is considering a project to export propane from a terminal along Canada’s Pacific Coast and is assessing customer interest for a third expansion of its Peace, Northern and Swan Hills pipelines in northwest Alberta, Pembina Chief Executive Officer Robert Michaleski said on a conference call with analysts on March 4.

That’s on top of a second build out announced this month on the Peace and Northern conduits, part of the C$1 billion in new projects. Pembina plans to twin its 73,000 barrel-per-day plant, or fractionator, that strips ethane from liquids, which it acquired by purchasing Provident last year. It will also double the capacity of a plant being built to extract liquids from the gas stream in Alberta.

‘Cements’ Position

Pembina is in talks with potential customers and may pursue additional projects related to natural gas liquids and crude oil, such as storage, pipelines and gas processing, Michaleski said in a phone interview yesterday.

“Ultimately we’re probably talking in that range of C$4 billion in projects that we will get to announce, and we’ve announced some of them, for the next three- to five-year period,” Michaleski said, declining to give details.

Infrastructure to extract, process and transport natural gas liquids in Alberta is full, the CEO said. The industry will need new export markets for future excess propane supplies that may push down prices in the province, he said, predicting there will be enough local demand for ethane and condensate.

With the expansions, Pembina “cements” its position as the largest provider of fractionation services in Western Canada, said Steven Paget, an analyst at FirstEnergy Capital Corp. in Calgary who rates the company a buy and owns Pembina debentures.

Liquids Output

“Pembina is starting to look like the Enterprise Products Partners (EPD:US) of Canada,” referring to the Houston-based company, a so-called “midstreamer” which takes output from producers, processes it and transports it to market, Paget said in a phone interview on March 25.

Producers are boosting liquids output to counter low gas prices caused by a boom in production from shale formations across the continent. After touching a 10-year low of $1.907 per million British thermal units on April 19, North American gas prices settled at an 19-month high of $4.068 in New York today.

Liquids output in Western Canada will probably increase 39 percent to 420,000 barrels a day by 2025 from 303,000 currently, according to a forecast by Calgary-based ITG Investment Research on March 25. Demand is also rising for condensate, the light hydrocarbon liquid, from oil-sands producers.

Touch Molecules

Condensate, required to thin heavy bitumen for pipeline transport, will probably more than double to 700,000 barrels a day by the end of the decade from 310,000 last year, ITG said.

Pembina may have an edge in profiting from the rush to liquids by building on its integrated business model, said Juan Plessis, an analyst at Canaccord Genuity Corp. in Vancouver who rates Pembina a buy and doesn’t own shares.

“Where they have an advantage is that they touch the molecules at various points” through the cycle and are able to garner premium returns, Plessis said.

Pembina’s existing pipeline network cuts across much of the oil fields in western Canada that are being rejuvenated with modern drilling and well technologies allowing development of liquids, Plessis said, pointing to the Montney, Deep Basin, Duvernay, Cardium and Slave Point.

Rather than buying the gas supply, Pembina’s new projects will charge customers a fee for processing, so they shelter the company from commodity price swings, Plessis said.

‘Blue-Chip’ Stocks

Environmental opposition to oil-sands development has contributed to delays for pipeline proposals such as TransCanada Corp. (TRP)’s Keystone XL crude line from Alberta to the U.S. Gulf Coast, which depends on a U.S. approval the company expects this year. Pembina’s assets are largely in Alberta, where protests haven’t been as big as in the U.S. or British Columbia.

Canadian pipeline stocks are hovering near record highs amid attempts to block new conduits. Investors are seeking yield in an industry they predict has a stable growth outlook, John Clark, president of Pacific Spirit Investment Management Inc. in Vancouver, said in a phone interview on March 22.

“There’s a flight to blue-chip dividend-paying stocks because individual investors can’t find an income return that’s meaningful in the fixed income area, so they’re looking at the pipeline stocks,” Clark said.

If interest rates rise, Pembina’s stock may be hurt, Bushell said. “There may be a period of time where it flattens out.”

‘Premium’ Stock

Pembina is the priciest stock among peers, with an enterprise value at 15.9 times its earnings before interest, taxes, depreciation and amortization, according to Bloomberg data. The premium is also the highest when compared to Bloomberg estimates for the next 12 months. Enterprise value is a measure of company’s value, including market capitalization, debt, preferred shares, and excluding cash.

With C$345 million in equity issuance complete this month, probably the last in 2013, investors should accumulate Pembina shares despite the premium cost and expect a dividend increase as soon as later in the year, Robert Kwan, an analyst at RBC Capital Markets in Vancouver, said in a March 21 note.

“We believe the growth visibility for projects that will largely contribute in 2015 underpinned by long-term, take-or-pay contracts is supportive of the premium,” Kwan said.

To contact the reporter on this story: Rebecca Penty in Calgary at rpenty@bloomberg.net

To contact the editor responsible for this story: Susan Warren at susanwarren@bloomberg.net


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