The last of the energy companies in our portfolio have now reported Q4 results and updated their guidance and none of them had bigger news for investors than Canada’s third largest midstream company, Pembina Pipeline Corp (PBA), asserts Elliott Gue, editor of Energy & Income Advisor.
The tenure of new CEO Scott Burrows got off to a bang as the company announced it will merge certain Western Canada gas processing assets with those of private capital firm KKR. Pembina will own 60 percent and operate the assets, while KKR will own 40 percent and provide financial backing for expansion.
The first step in that direction will be the acquisition of Energy Transfer LP’s (ET) Canadian assets, which at this point consist of a 51 percent joint venture with KKR & Co. (KKR).
That deal is expected to close “late in Q2 or Q3 of 2022,” following the highly likely approval of the Canadian regulators. And it will create a dominant gas processing platform in the Canada’s Montney and Duvernay shale basins with close proximity to the Pacific Coast.
Continuing legal and regulatory opposition convinced Pembina to shelve the proposed Jordan Cove export facility in Oregon, which it inherited with the 2017 acquisition of the former Veresen. The assets in this deal were also largely part of that purchase. And potential exports are a major incentive for the partners, with the LNG Canada facility on track to come on line mid-decade. The company also has an LNG project in the works with the Haisla Nation.
Canadian oil, natural gas and natural gas liquids exported from the Pacific Coast are considerably closer to Asian markets than the US Gulf of Mexico. That’s a massive potential advantage for facilities able to run the regulatory gauntlet to get sited, permitted and eventually built, as Altagas Ltd.’s (ATGFF) LPG export facility already enjoys.
In any case, the deal will be immediately accretive to Pembina’s earnings in the first year. That’s in part because of numerous synergies for the combining assets. But the company will also receive CAD700 million in cash proceeds to cut debt by CAD550 million and buy back stock. Management has also promised a 3.6 percent dividend increase at the close. And S&P has affirmed the company’s BBB rating with a stable outlook.
Pembina’s Q4 results were solid, with adjusted cash flow from operating activities per share increasing 20.9 percent. The payout ratio declined to 47.4 percent and EBITDA advanced by 12 percent.
That was despite a -4.9 percent decline in total average daily system volumes and some expired contracts in the oil sands transport business, as the combination of assets entering service, higher margins on liquids and strong export volumes more than offset the impact on cash flow.
One reason we’ve liked this company over the years is that management has consistently kept its financial and operating policies conservative, even as it has thought and acted big when expanding the business. That’s still our view and Pembina continues to rate a buy under $38.
