Buy Pembina for growth and income

The outlook for Pembina is more positive as economies around the world gradually re-open and global energy prices rebound significantly.


Pembina’s pipelines transport hydrocarbon liquids and natural gas products primarily in Western Canada.

Pembina likely experienced the worst of the fallout from COVID-19 in the second quarter. Throughout this time, the company continued to operate, providing uninterrupted service to its customers.

The impact of low crude oil and natural gas liquids (NGL) prices caused oil and gas producers to cut production. And this, of course, caused a temporary decline in physical volumes in certain of Pembina’s businesses. But the impact on the company’s financial results was not as significant due to the highly contracted commercial framework of its business and the broad diversification of its customers and commodities.

Pembina Pipeline Corp. (TSX—PPL) owns an integrated system of pipelines that transport various hydrocarbon liquids and natural gas products produced primarily in western Canada. It also owns gas gathering and processing facilities, an oil and NGL infrastructure and logistics business, is growing an export terminals business, and is developing a petrochemical facility to convert propane into polypropylene.

With Q2 behind it, outlook is positive

For the second quarter ended June 30, 2020, Pembina’s adjusted cash flow from operating activities (ACFFO) was $586 million, or $1.07 a share, compared with $550 million, or $1.08 a share, in the same period of 2019.

The higher ACFFO reflected an increase in operating results after adjusting for non-cash items, an increase in payments that were received and deferred, and a decrease in taxes paid. The lower ACFFO per share reflected more shares outstanding caused by the 2019 Kinder Morgan Canada acquisition.

Adjusted EBITDA (earnings before interest, taxes, depreciation and amortization) rose 3.1 per cent to $789 million, thanks largely to the contribution of new assets following the Kinder acquisition and a realized gain on commodity-related derivatives. This was partly offset by lower margins on crude oil and NGL sales in the marketing business due to lower commodity prices and frac spreads, and a lower contribution from the Alliance pipeline and the Aux Sable midstream business.

With the second quarter behind it, Pembina’s outlook for the remainder of the year is more positive as economies around the world have entered various stages of re-opening and global energy prices have rebounded significantly from the lower levels seen during the crisis. Consequently, the company continues to expect 2020 adjusted EBITDA to remain within the guidance range of $3.25 billion and $3.55 billion it projected late last year. But management now believes just the lower end of the range is achievable. Meanwhile, the company should exit 2020 in a strong financial position.

Pembina trades at only 7.1 times its forecast 2020 ACFFO of $4.35 a share. Its annual dividend of $2.52 a share yields a high 8.1 per cent.

Pembina Pipeline is a buy for growth and income.

This is an edited version of an article that was originally published for subscribers in the MONTH 00, 201X, issue of Money Reporter. You can profit from the award-winning advice subscribers receive regularly in Money Reporter.

Money Reporter, MPL Communications Inc.
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