Morningstar | Raising Pembina Pipeline’s Fair Value Estimate, but Stock Remains in 3-Star Territory. See Updated Analyst Note from 05 Mar 2019
After taking a fresh look at Pembina’s fourth-quarter earnings results, we are increasing our fair value estimate to $36 (CAD 47) from $33 (CAD 43). Our increased fair value estimate is driven by the company’s additional Peace Pipeline system expansions, PDH/PP facility joint venture, and our lowered cost of debt assumption as the company continues to improve its balance sheet.Despite the increase in our fair value estimate, the stock remains in 3-star territory. 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 4.6% yield sits at the bottom of the Canadian midstream space, and we see better opportunities from and upside and yield perspective among peers.
Furthermore, we are maintaining our narrow moat rating.
As a reminder, Pembina generated fourth-quarter adjusted EBITDA of CAD 715 million, a 6% year-over-year increase, but a 4% decrease sequentially. Adjusted EBITDA came in below our expectations, driven by worse-than-expected results from the Veresen assets and lower-than-expected volumes in the pipelines and facilities divisions. Adjusted cash flow from operating activities for the quarter was also below our expectations, coming in at CAD 543 million, but up 9% from the year-ago period. More important, adjusted operating cash flow per share increased to CAD 1.07 from CAD 0.99, representing value added since the Veresen acquisition. The 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 3 billion in expansion projects, including the Phase VIII Peace Pipeline and a PDH/PP facility joint venture. We don’t expect these projects to be fully placed in service until 2023, but they provide longer-term growth opportunities. In the meantime, Pembina announced its 2019 adjusted EBITDA guidance in the range of CAD 2.8 billion-CAD 3 billion, which is slightly above our expectations.
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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