Pembina Pipeline Corp

Pembina Pipeline Corp (TSX: PPL) is a Canada-based transportation and midstream service provider company that owns an integrated system of pipelines that transport various hydrocarbon liquids and natural gas products produced primarily in western Canada.

Key highlights 

• Financial guidance on 2021: The company expects to record adjusted EBITDA in a range of CAD 3.2-3.4 billion. It is also looking to execute a capital investment program of CAD 785 million. Moreover, the capital investment program would be fully funded by cash flow from operating activities, which is appreciable. 

• An income play: The group has a strong history of consistent dividend payouts, backed by stable cash flows, which is a key positive. Moreover, at the last closing price, the stock was offering a dividend yield of 6.94%, which is lucrative amid a low interest rate environment.

Source: Refinitiv (Thomson Reuters)

• Higher adjusted EBITDA: The company clocked a higher adjusted EBITDA of CAD 866 million in Q4 2020, increased by CAD 79 million, against CAD 787 million in the previous corresponding period. The rise in adjusted EBITDA was primarily due to the Cochin Pipeline and Edmonton Terminals' contribution, combined with the Phase VI Expansion coming into service and lower operating expenses on the conventional pipeline assets.

Source: Company 

• Cost-saving measures: The management took some prudent steps to enhance its efficiency. Over CAD 150 million of cost savings and efficiencies were realized by the company throughout the business. Furthermore, it deferred some previously announced expansion projects, reducing 2020 capital spending by approximately CAD1 billion and strengthened the liquidity. 

Financial overview

Source: Company 

• The company reported lower revenue at CAD 6.2 billion in FY2020, against CAD 7.2 billion in the previous corresponding period. The decline was largely due to weaker global energy demand throughout most of 2020 on account of the COVID-19 pandemic.

• Gross profit for the period stood at CAD 2.0 billion, against CAD 2.4 billion in pcp.

• The company reported a considerable decline in its operating profit, which stood at CAD 4 million, against 1.8 billion in pcp. Higher impairment expenses were the sole reason behind this.

• Net loss stood at CAD 316 million in 2020, against a profit of CAD 1.5 billion. 

Risks associated with investment

Continuation of COVID-19 breakout might take a toll on the overall operations. Moreover, any change in the demand dynamics of the oil and gas would take a toll on the company’s performance. 

Valuation Methodology (Illustrative): EV to Sales

Note: All forecasted figures and peers have been taken from Thomson Reuters 

Stock recommendation

The group serve the complete hydrocarbon value chain, with roughly 40% of its business derived from the crude oil and condensate value chain, 30% from the NGL value chain and 30% from the natural gas value chain. The recent acquisition of high-quality assets such as Cochin Pipeline and the Edmonton Terminals storage assets, combined with the development of highly contracted assets, has further diversified the business. On the back of a gradual revival in oil demand and economic activities, the company expects to clock the adjusted EBITDA in a range of CAD 3.2-3.4 billion for 2021. Moreover, the stock carries a lucrative dividend yield amid a low-interest-rate environment. Therefore, based on the above rationale and valuation, we recommend a “Buy” rating at the closing price of CAD 36.29 on March 26, 2021. We have considered Enbridge Inc, Inter Pipeline Ltd, and TC Energy Corp. etc. as the peer group for the comparison.

1-Year Price Chart (as on March 26, 2021). Source: Refinitiv (Thomson Reuters)

Keyera Corp.

Keyera Corp (TSX: KEY) operates an integrated Canadian-based midstream business. The Company is organized into two business units: Gathering and Processing Business Unit and Liquids Business Unit. The company operates over 5,000 kilometers of gathering pipelines and 15 natural gas processing plants.

Key highlights 

• An income play: The group has a strong history of consistent dividend payment, backed by stable cash flows, which is a key positive. Moreover, at the last closing price, the stock was offering a dividend yield of 7.4%, which is lucrative amid a low interest rate environment.

Source: Refinitiv (Thomson Reuters)

• Higher distributable cash flow: On the back of the resilient business, since 2008, the company’s distributable cash flow grew at a CAGR of 9%. In Q4 2020, the group clocked DCF of CAD 133 million, while for the full year, it stood at the record level of CAD 718 million representing an annual increase of 21%.

Source: Company 

• Strong financial position: The company maintained a strong financial position and exited the year with a net debt to adjusted EBITDA ratio of 2.9x, which is within its stated targeted range of 2.5x to 3.0x. Available liquidity at year-end was CAD 1.2 billion with minimal long-term debt maturities over the next 5 years.

Source: Company

• Cost Reduction Initiatives: In last year, the company set an annual cost savings target of CAD 45-65 million. The company made significant progress toward this goal, enhancing its competitive position and reducing its cost structure. Most of the benefit is expected to materialize by the end of 2021.

Source: Company 

Financial overview (In thousands of CAD)

Source: Company 

• The company declared its annual results, wherein it posted revenue of CAD 3.0 billion, compared to CAD 3.6 billion in FY2019. The decline was majorly due to a significantly lower income from the Gathering & Processing segment and Marketing segment.

• The operating margin stood at CAD 940.5 million, lower than CAD 1,004.1 million in pcp. The decline was primarily attributable to lower revenue, partially offset by lower expenses.

• EBIT in FY2020 plunged to CAD 73.1 million, from CAD 460.4 million in FY2019. The decline was majorly attributable to a higher G&A expense, Finance cost, depreciation cost and inclusion of impairment expense of CAD 371.3 million.

• On the back of the above-stated reasons, the company posted lower net income at CAD 62.0 million, against CAD 443.6 million in pcp. 

Risks associated with investment

The company’s performance is correlated to the demand and price of crude oil and natural gas. Any volatility in the prices of these commodities or setback to demand would hamper the company’s performance. 

Valuation Methodology (Illustrative): Price to Cash Flow 

Note: All forecasted figures and peers have been taken from Thomson Reuters 

Stock recommendation

During 2020, the company demonstrated its resilience and positioned itself to keep the momentum going in 2021. The commodity markets and the outlook for its customers appear to be improving. Moreover, it has several catalysts in the near-term, contributing to growing distributable cash flow. Furthermore, the company intends to focus on all aspects of ESG performance and further investigate ways to continue to play an active role in the energy transition. The company is clocking record distributable cash flows, which is a key positive. On top of all, the stock is offering a lucrative dividend yield amid a low-interest rate environment. Therefore, based on the above rationale and valuation, we recommend a "Buy" rating at the closing price of CAD 25.93 on March 26, 2021. We have considered Inter Pipeline Ltd, Pembina Pipeline Corp, and Gibson Energy, etc. as the peer group for the comparison.

1-Year Price Chart (as on March 26, 2021). Source: Refinitiv (Thomson Reuters)

Disclaimer

The advice given by Kalkine Canada Advisory Services Inc. and provided on this website is general information only and it does not take into account your investment objectives, financial situation and the particular needs of any particular person. You should therefore consider whether the advice is appropriate to your investment objectives, financial situation and needs before acting upon it. You should seek advice from a financial adviser, stockbroker or other professional (including taxation and legal advice) as necessary before acting on any advice. Not all investments are appropriate for all people. The website www.kalkine.ca is published by Kalkine Canada Advisory Services Inc. The link to our Terms & Conditions has been provided please go through them. On the date of publishing this report (mentioned on the website), employees and/or associates of Kalkine do not hold positions in any of the stocks covered on the website. These stocks can change any time and readers of the reports should not consider these stocks as advice or recommendations later.