Morningstar | More Expansion Ahead for Pembina Pipeline
Narrow-moat Pembina Pipeline generated third-quarter adjusted EBITDA of CAD 732 million, a 98% year-over-year increase and a 5% increase sequentially. Adjusted EBITDA came in above our expectations, driven by better-than-expected results from the Veresen assets and record volumes in the pipelines and facilities divisions. Adjusted cash flow from operating activities for the quarter was below our expectations, coming in at CAD 523 million, but up 67% from the year-ago period. More important, adjusted operating cash flow per share increased to CAD 1.03 from CAD 0.78, representing value added since the Veresen acquisition. Increased year-over-year performance was driven by the acquisition of the Veresen assets and higher pipeline and gas service volumes.The company also announced that it plans to undertake an additional CAD 1.3 billion in expansion projects that are backed by long-term, take-or-pay contracts. The expansion projects span Pembina’s full value chain, including the operations of legacy Veresen business. The projects include: natural gas gathering, processing, and transmission; propane and condensate transportation; and fractionation assets. Phase VII of the Peace system pipeline represents the majority of the expansion projects with an estimated cost of CAD 950 million. Phase VII is expected to be placed into service during the first half of 2021.
We plan to incorporate the company’s third-quarter results into our model shortly, but for now we are maintaining our $33 (CAD 43) fair value estimate and our narrow moat rating.
For a detailed look into the Canadian crude and pipeline trends, please refer to our September Energy Observer, "Don't Overlook Oil Sands: Falling Costs and More Infrastructure Will Make Canadian Production Globally Competitive."
Pembina Pipeline has four operating segments: conventional pipelines business, which is a tariff-based operation consisting of pipelines and related facilities that deliver crude oil and natural gas liquids; oil sands and heavy oil business, which consists of the Syncrude Pipeline, the Cheecham Lateral and the Horizon Pipeline; midstream and marketing business, which consists of Co.'s direct and indirect interest in a storage operation, its direct interest in terminals, storage and hub services under a mixture of short, medium and long-term contractual arrangements; and gas services business which consists of natural gas gathering and processing facilities.
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