Canadian energy stocks have been performing well of late. However, energy stock Veresen Inc. has been delisted from the Toronto Stock Exchange after it was taken over by its peer, oil and gas pipeline stock Pembina Pipeline Corp. The combination of the two creates one of the largest energy infrastructure companies in the nation.
A $7.51-billion merger with Veresen Inc. “enhances Pembina Pipeline Corp.’s (TSX—PPL) core strengths while also providing compelling strategic benefits such as scale, diversification and enhanced exposure to the Montney region,” according to CIBC Capital Market analysts Robert Catellier and Ian Woodward. They say it is an undervalued Canadian oil and gas stock. In other words, an oil and gas stock to buy now. The analysts maintain their “outperform” recommendation and increase their share price target to $50 from $49.
Veresen shareholders were offered either $18.65 per share in cash or 0.4287 shares of Pembina (with an implied valuation of PPL at $43.50 per share), subject to pro-ration based on a maximum cash consideration of $1.523 billion and a maximum share consideration of 99.5 million. Based on the shareholder election results, Veresen shareholders will own just under 20 per cent of the combined company. Pembina also exchanged roughly $536 million of Veresen preferred shares to a new series of Pembina preferred shares, with no changes to terms or conditions.
The analysts claim the Veresen deal provides Pembina with synergy, strategic benefits, enhanced growth potential, and the ability to extend its value chain. They also note that Pembina has a proven history of asset integration.
The assets being acquired are already physically connected or can be connected with relative ease. Like other Pembina acquisitions in the past, the analysts expect the takeover of Veresen to “look increasingly attractive over time” for the oil and gas stock.
Acquisition adds scale and increased US presence
Following the addition of Alliance and Ruby Pipelines, the analysts say Pembina gains a more significant presence in the US with the acquisition of Veresen, adding to its existing gathering system in the Bakken Formation.
The analysts say they view the US as a potential growth opportunity for Canadian mid-streamers in light of the “relatively favourable permitting environment and cost-competitiveness of US shale production”. The analysts add, that for its scale, they consider the acquisition as relatively lower risk due to the integration of key assets and the overlap in US geography and key customers.
They comment further:
“The $9.7-billion enterprise value acquisition of Veresen adds meaningful scale, without changing the character of Pembina’s earnings before interest, tax, depreciation and amortization profile, which will improve modestly to 87 per cent fee-for-service (estimated between 2018 to 2022). Enhanced exposure to the Montney region integrates nicely with Pembina’s assets and reduces long-term decline risk, in our opinion.
“Pembina and Veresen have a complementary asset base across basins with long resource life and cost-competitive production (Montney, Deep Basin, Duvernay, Bakken). Tighter integration of these portfolios can benefit producers by providing broader processing and market access optionality, potentially resulting in pull-through volumes across the combined company’s system.”
Pembina Pipeline is a diversified energy infrastructure company with assets across the hydrocarbon value chain, including pipelines, gathering and processing, and NGL (natural gas liquids) midstream operations in Canada and the US. Pro forma, Pembina’s $33-billion enterprise value makes it the third-largest Canadian pipeline and midstream company.
Robert Catellier and Ian Woodward are energy infrastructure analysts for CIBC Capital Markets.
This is an edited version of an article that was originally published for subscribers in the November 3, 2017, issue of Investor’s Digest of Canada. You can profit from the award-winning advice subscribers receive regularly in Investor’s Digest of Canada.
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