Pembina Pipeline Corporation is a North American oil and gas stock that transports crude oil and natural gas liquids. The company’s high-quality assets and integrated structure should permit it to realize significant growth opportunities, while providing shareholders with a relatively defensive oil and gas stock investment in the energy sector.
Rising oil prices have lent considerable support to oil and gas stocks since January. In that month, West Texas intermediate crude oil fell to a low of about US$27. Since then, however, it has risen to approximately $43 on optimism that slower production will rebalance the oil market in the next couple of years. One beneficiary of this optimism is Pembina Pipeline Corporation (TSX─PPL; NYSE─PBA). In January, the company’s shares fell to a low of about $26. Now the shares are trading at nearly $38, a rise of close to 50 per cent in three months.
Pembina is a leading transportation and midstream service provider that has served North America’s energy industry for over 60 years. The company owns and operates an integrated system of pipelines that transports various products derived from natural gas and hydrocarbon liquids produced in western Canada and North Dakota. It also owns and operates gas gathering and processing facilities and an oil and natural gas liquids infrastructure and logistics business.
Despite the difficult commodity price environment, the company posted its highest ever adjusted cash flow last year. For the year ended Dec. 31, 2015, Pembina’s adjusted cash flow from operating activities (ACFFO) was $878 million, or $2.53 a share, compared with $777 million, or $2.38 a share, in 2014.
The increase was primarily due to a rise in operating margin and lower current tax and share-based compensation expenses. The operating margin rose 3.7 per cent to $1.1 billion, thanks largely to increases in the company’s conventional oil and gas services business from new assets being placed in service and increased volumes.
Indeed, $1.3 billion of new fee-for-service assets were placed into service during the year. The additional cash flows from these assets, as well as the anticipated cash flows from the $556-million acquisition of midstream assets earlier this year, has let Pembina raise its dividend once again. The company will now pay a monthly dividend of $0.16 a share, up 4.9 per cent from the $0.1525 it paid previously. This is the fifth consecutive year in which the dividend has been increased.
Pembina continues to advance growth projects in all its businesses. For example, the company recently received regulatory approval to construct two 270 kilometer pipelines between Fox Creek and Namao, Alberta. These pipelines form part of the company’s Phase III expansion program, which is the largest capital project in its history.
Pembina yields 5.1 per cent and trades at 14.2 times its forecast 2016 ACFFO of $2.65 a share. We believe this premium valuation is justified by the company’s high-quality assets.
Pembina Pipeline is one of our best buys for growth and income.
Money Reporter, MPL Communications Inc.
133 Richmond St. W., Toronto, On, M5H 3M8, 1-800-804-8846