Morningstar | Pembina Remains in 3-Star Territory
After taking a fresh look at Pembina Pipeline’s first-quarter earnings results, we are decreasing our U.S. fair value estimate to $35 from $36 due to changes in foreign currency exchange rates. However, we are maintaining our CAD 47 Canadian fair value estimate and narrow moat rating. The stock remains in 3-star territory, and we think that the market has appropriately recognized the company's growth potential, limiting the stock's upside. Future growth projects could be limited by the decline in demand for condensate as oil sands producers incorporate solvents into the production process or may not carry the same economics as the company’s attractive pipeline network. Pembina’s 5.1% forward yield sits at the bottom of the Canadian midstream space, and we see better opportunities from and upside and yield perspective among peers.As a reminder, Pembina generated first-quarter adjusted EBITDA of CAD 773 million, a 12% year-over-year increase and an 8% increase sequentially. Adjusted EBITDA came in above our expectations, driven by a better-than-expected contribution from Pembina’s growth projects that were placed into service during 2018. Adjusted cash flow from operating activities for the quarter was also above our expectations of CAD 551 million, at CAD 578 million. The adjusted cash flow was up 9% from the year-ago quarter. More important, adjusted operating cash flow per share increased to CAD 1.52 from CAD 1.34, representing value added since the Veresen acquisition. The increased year-over-year performance was driven by the acquisition of the Veresen assets, contributions from growth projects that were placed into service during 2018, and higher pipeline and gas service volumes.
Pembina increased its monthly dividend by 5.3% to CAD 0.20 per share, which is what we expected. On an annualized basis, the stock carries a 5.1% dividend yield. However, the yield sits on the lower end of the spectrum compared with other Canadian midstream peers.
For a detailed look into the Canadian crude and pipeline trends, please refer to our January Energy Observer, "Pipelines Are Canada’s Lifelines."
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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