(Idea) Pembina - The Best Large-Cap Midstream Opportunity Outside Of MLPs
By: Jon Costello
Note: Dollar figures are in Canadian dollars unless otherwise specified.
Pembina (PPL:CA) (PBA) shares are currently the most attractively priced among large-cap midstream corporations. The shares, trading at slightly under $52, trade at a discount compared to peers. Their 5.2% dividend yield is relatively high, while the company benefits from one of the more conservative leverage profiles.
I expect Pembina to maintain its conservative financial posture while continuing to grow consistently over at least the next five years.
Such growth would be consistent with the company’s long-term average. Adjusted EBITDA per share has compounded at a 5.5% annual rate over the last six years. The table below shows the growth.
Part of the relative discount on Pembina’s shares stems from its liquids-weighted operations. Liquids midstream assets tend to have more variable volumetric flows, are generally more capital intensive, and present fewer opportunities to earn income throughout the product value chain. Consequently, they garner a higher valuation multiple, and rightfully so.
However, we’d argue that Pembina’s conservative financial position, stable operating performance, and high-margin growth opportunities in both oil and natural gas are an average—or even premium—multiple versus its peers.