Pembina Pipeline Corporation

Pembina Pipeline Corporation (TSX: PPL) is an integrated midstream energy infrastructure player, having operations in western Canada and North Dakota. The group has its regional pipeline network of more than 9,000 kilometers of conventional hydrocarbon pipelines, combined with 1,650 kilometers of heavy oil and oil sands pipelines.

Key Updates:

• Better than industry-margins: The company posted higher margins compared to the industry median, which reflects improved operational efficiency. EBITDA margin and operating margin in Q3FY20 stood at 44% and 32.6%, respectively, as compared to the industry median of 34.4% and 7.3%, respectively. Notably, the company reported net margin at 20.3%, higher than the industry median of negative 1%. 

• Impressive Sequential growth: The group reported improved revenue, gross profit and operating income at CAD 1,569 million, CAD 563 million and CAD 511 million in Q3FY20, against CAD 1,268 million, CAD 455 million and CAD 416 million, respectively in Q2FY20. Moreover, net income grew to CAD 318 million, significantly higher than CAD 253 million in Q2FY20.

• 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 close, the stock was offering a dividend yield of ~7.15%, which is lucrative amid a low interest rate environment. 

Q3FY20 Financial highlights:

• PPL announced its quarterly result, wherein the group reported revenue of CAD 1,569 million, lower than CAD 1,700 million in the previous corresponding period (pcp). The decline was primarily attributable to a lower income from Marketing & New Venture (CAD 825 million versus CAD 1,106 million in pcp), partially offset by improved performance from Pipelines and Facilities segments.

Segment Highlights (Source: Company Reports)

• Gross profit stood at CAD 563 million, lower than CAD 613 million in Q3FY19. The decrease was due to lower revenue, partially offset by a lower cost of sales (CAD 1,068 million versus CAD 1,221 million).
• Results from operating activities stood at CAD 511 million as compared to CAD 551 million in Q3FY19, primarily attributable to a lower general and administrative costs (CAD 56 million versus CAD 64 million in pcp).
• The company posted net earnings of CAD 318 million as compared to CAD 370 million, a year ago.
• Cash and cash equivalent stood at CAD 31 million, while total assets were reported at CAD 33,995 million.

Q3FY20 Income Statement Highlights (Source: Company Reports)

Risk: Continuation of COVID-19 breakout might take a toll on the overall operations. Moreover, changing consumer preference for renewable sources of energy might reduce the overall demand for natural gas and crude oil.

Valuation Methodology (Illustrative): Price to CF Based

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

Stock Recommendation:

The stock of PPL appreciated ~17% and ~12% in the last three months and nine months, respectively, and closed above the long-term support levels of 100-days, 150-days and 200-days SMAs, indicating a bullish pattern.  The company has a strong operating history in the North America region and is expanding the footprints across international markets. Further, the group is offering a hefty dividend yield, which is encouraging from an income investor’s standpoint. We have valued the stock using the Price to CF based relative valuation method and have arrived at a double-digit upside (in percentage terms). For the said purposes, we have considered peers like TC Energy Corp, Inter Pipeline Ltd etc. Considering the aforesaid facts, we recommend a ‘Buy’ rating on the stock at the closing market price of CAD 35.22 on February 12, 2021.

PPL Daily Technical Chart (Source: Refinitiv, Thomson Reuters)

Cenovus Energy Inc

Cenovus Energy Inc (TSX: CVE), is a Canada-based integrated oil and natural gas company. Its operations include oil sands projects in northern Alberta and oil production in Alberta and British Columbia.

Key highlights 

• Management’s guidance for 2021: Recently, the company released its guidance numbers for 2021, including sustaining capital of approximately CAD 2.1 billion to deliver upstream production of roughly 755,000 BOE/d and downstream throughput of approximately 525,000 bbls/d.

• Robust synergies from the Husky Acquisition: The company expects to achieve nearly CAD 1 billion of synergies this year as a result of the recent transaction with Husky, putting the firmly on track to reach its planned CAD 1.2 billion in annual run-rate synergies by the end of 2021. 

• Increased oil sand production: In 2020, the company achieved average oil sands production of 381,723 bbls/d for the year, up 8% from 354,257 bbls/d in 2019, when the volumes were reduced to match limits under the Government of Alberta’s curtailment program. In Q4 2020, production increased 2% to 380,693 bbls/d, against Q4 2019, as the company purchased production curtailment credits to produce above the government’s output limits before mandatory curtailment ended in early December. 

• Divested Marten Hills assets:On December 2, 2020, the company sold Marten Hills assets in northern Alberta to Headwater Exploration Inc. for a total consideration of CAD 138 million. Total consideration received by the company consists of CAD 33 million cash, 50 million common shares valued at CAD 97 million and 15 million share purchase warrants valued at CAD 8 million at the date of close. 

Financial overview of Q4 2020

Source: Company

• In Q4 2020, the revenues decreased by CAD 1,412 million to CAD 3,426 million, against CAD 4,838 million in the previous corresponding period. The fall in net revenues was primarily due to Lower average realized liquids sales prices and lower natural gas sales volumes.
• The company posted operating loss of CAD 346 million in the reported quarter against an operating profit of CAD 83 million in the previous corresponding period, primarily due to higher DD&A expenses due to CAD 298 million in impairments and write-downs, lower Cash from operating activities.
• Net loss stood at CAD 153 million in Q4 2020, against Net Earnings of CAD 113 million in Q4 2019. The change was primarily due to higher Operating Loss, as discussed above, partially offset by non-operating unrealized foreign exchange gains of CAD 358 million.

Risks associated with investment 

As the company is in the exploration business of oil and gas, its revenues are correlated to the oil prices. Any volatility in oil prices is likely to affect the group’s performance. Other factors that could impact the financial performance include low demand for oil and gas, and financial risk on behalf of their hedged positions. 

Valuation Methodology (Illustrative): EV to EBITDA

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

Stock recommendation

In the current commodity price environment, the company is focusing on maintaining balance sheet strength and liquidity. Its objective is to preserve the capital to ensure that it has sufficient liquidity through all stages of the economic cycle. The group targets a Net Debt to Adjusted EBITDA ratio of less than 2.0 x in the long-term. After closing the arrangement with Husky, the management believes achieving a cumulative free funds flow of approximately CAD 11 billion through 2024. Further, the group has raised its production guidance, which reflects the macros are changing gradually. Therefore, based on the above rationale and valuation, we have given a “Buy” rating at the closing price of CAD 8.57 on February 12, 2021. We have considered Canadian Natural Resources Ltd, MEG Energy Corp, Imperial Oil Ltd, etc. as the peer group for the comparison.

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.