2 oil and gas stocks teaming up

The combination of two midstream oil and gas stocks—Pembina and Veresen—will create a leading North American energy infrastructure company. Assuming approvals are received, we advise tendering your Veresen shares to the offer when the transaction is expected to close later this year. Pembina, meanwhile, remains a buy.

Infrastructure_StocksPembina Pipeline Corporation (TSX—PPL; NYSE—PBA) and Veresen Inc. (TSX—VSN) have agreed to merge, creating one of the largest infrastructure stocks in Canada with a proposed enterprise value of about $33 billion.

Pembina caters to the oil & gas industry. Its services include transportation of oil & gas through its pipelines.

Veresen is an energy infrastructure company that owns and operates assets within both the pipeline and midstream operations segments.

The combined company will have an asset base supported by long-life, economic hydrocarbon reserves concentrated in some of the most prolific resource plays in North America. The portfolio will include crude oil, liquids and natural gas pipelines, terminal storage and midstream operations, gas gathering and processing facilities as well as fractionation facilities.

Management of the companies expects shareholders to benefit in four ways from the combination:

1) The combined asset base will be highly integrated across the value chain and will extend its geographical reach while enhancing its customer-service offering.

2) The combined company will benefit from diversification across resource basins and products, as well as customers and currency.

3) The cash flow of the new company will be over 85 per cent fee-for-service weighted, which should help maintain a strong balance sheet.

4) The transaction creates a larger organization that will be able to pursue larger growth projects.

Randy Findlay, Pembina’s Chair of the Board of Directors, has said the transaction provides “clear visibility to creating long-term value” for the shareholders of each company. Indeed, visibility is so clear that Mr. Findlay has expressed confidence that the dividend offered by the combined oil and gas stock will be increased by 5.9 per cent upon the close of the transaction.

Under the agreement, Pembina offers to acquire all of the issued and outstanding shares of Veresen, a transaction valued at $9.7 billion. Pembina has offered to exchange each of Veresen’s shares for either 0.4287 of a common share of Pembina, or $18.65 in cash a share, subject to pro-ration based on maximum share consideration of about 99.5 million Pembina shares and maximum cash consideration of about $1.5 billion.

That means, assuming full pro-ration, each Veresen shareholder would receive $4.984 in cash and 0.3172 of a common share of Pembina for each Veresen share.

The offer represents a 22.5-per-cent premium to Veresen’s closing share price of $15.23 the first business day before it was announced on May 1. We regard the offer as fair and likely to succeed. Given that Veresen’s current stock price is close to the offer price, we now view Veresen as a hold. And, assuming shareholder and regulatory approvals are received, we advise tendering your shares to the offer when the transaction is expected to close either in the third or fourth quarter of this year. Pembina, meanwhile, remains a buy.

This is an edited version of an article that was originally published for subscribers in the June 16, 2017, 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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