Morningstar | More Expansion Ahead for Pembina Pipeline
Pembina Pipeline operates as a transportation and midstream service provider in North America. The company owns and operates an integrated system of pipelines that transport crude oil, natural gas, and natural gas liquids. Supplementing the pipelines are the company’s natural gas gathering and processing facilities, oil and NGLs infrastructure, and logistics business. Pembina’s integrated value chain offers producers a full spectrum of midstream and marketing services.The company’s operations don’t enjoy many of the regulatory protections afforded to intrastate pipeline operators, highlighted by the absence of strict approval requirements for new projects. Additionally, Pembina’s gathering and processing operations are tied directly into natural gas producer’s wellheads, which exposes the company to production cuts. However, most of the company’s operations are underpinned by long-term contracts, mitigating the risks associated with midstream operations.Pembina’s growth portfolio consists of CAD 3.1 billion in remaining projects that are expected to be in service by 2020. Because of the recent success of the Phase 3 pipeline expansion project, the company announced additional Phase 4, 5, 6, and 7 expansions that will add stable cash flows from incremental pipeline capacity. The recent Veresen acquisition affords the company with additional growth projects that contain similar economics to Pembina's current operations.We expect Pembina to increase its annual dividend at an average annual rate of 5% over the next five years while maintaining a comfortable distributable cash coverage ratio that averages 1.95 times. Pembina is in a strong position to benefit from the growing supply and demand for hydrocarbons in western Canada while rewarding investors with a stable dividend of roughly 4.8%. However, the market has appropriately recognized the company’s growth potential, and the stock looks fairly valued at the current level.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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