Morningstar | Pembina Reports a Strong Quarter; Raising Our FVE but Stock Looks Fairly Valued
Narrow-moat Pembina Pipeline generated second-quarter adjusted EBITDA of CAD 700 million, a 136% year-over-year increase. Adjusted EBITDA came in above our expectations, driven by better-than-expected results from the Veresen assets. Adjusted cash flow from operating activities for the quarter was also below our expectations, coming in at CAD 558 million, or up 103% from the year-ago period. More important, adjusted operating cash flow per share increased to CAD 1.11 from CAD 0.68, 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.Pembina continues to advance its Phase VI Peace Pipeline expansion. The Phase VI project is expected to cost CAD 280 million and is anticipated to be in service by early 2020. The Alliance expansion looks less likely as it did not reach its target commitments during the open season.
We are raising our fair value estimate for Pembina to CAD 43 from our previous estimate of CAD 42, driven by our increased outlook for the Veresen assets. Because of movements in foreign exchange rates, we are maintaining our $33 U.S. fair value estimate. Despite the increase in our fair value estimate, the stock looks fairly valued. 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. Furthermore, we are maintaining our narrow moat rating.
Furthermore, Pembina increased its monthly dividend by almost 6% to CAD 0.19 per share. The annualized dividend represents a 4.8% yield.
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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