Pembina Pipeline Stock: Steady Stream of Revenue and Growth (NYSE:PBA)

Those who think value investing is a failed strategy may want to check out how value stocks have performed over the past 12 months, given that once-beaten segments like energy midstream, REITs, tobacco and pharmaceutical stocks have all seen significant gains during that time. frame.

It’s times like these that make investors wish they could turn back the clock and tell their past selves to invest in high-quality stocks at low prices. If they can’t, it’s worth noting that recent bullishness doesn’t necessarily mean that value stocks are now expensive.

This brings me to Pembina Pipeline Corporation (NYSE:PBA), which has seen a 34% price increase over the last 12 months, as shown below.

However, if we look at a longer period of time, we can see that while PBA While the company’s shares have risen significantly since 2007, they are down 13% from where they were 10 years ago, even though the company’s EBITDA has increased and its business fundamentals have improved over the same period.

In this article, I describe PBA and its business performance and discuss why it is still a good opportunity for high income and potentially high total returns at the current price. Let’s get started!

Steady flow of income and growth

Pembina Pipeline Corp is a Canadian midstream company focused on the Western Canadian Sedimentary Basin, serving the region with an extensive network of pipelines transporting crude oil, natural gas, NGL and processing facilities.

As shown below, PBA plays a key linking role between producers and end-users, industrial users, refiners and heavy oil producers, impacting multiple points along the hydrocarbon value chain.

PBA also benefits from the fact that it is a highly concentrated contract business and that 85% of its EBITDA is derived from fees, which reduces its exposure to commodity price risk.

PBA is operating in a supportive environment, achieving record financial and operational metrics in the second quarter of 2024. This includes adjusted EBITDA growth of 33% year-over-year to $1.1 billion, driven by the recent acquisition of the Alliance and Aux Sable assets. Additionally, PBA saw significant growth in pipeline volumes, reaching 2.7 million barrels per day, representing an increase of 11% year-over-year, partly due to the expansion of the Peace pipeline.

PBA is also benefiting from higher NGL volumes and margins. Notably, PBA also benefited in the second quarter from the absence of disruptions from wildfires this year as it did last year, which further boosted efficiency.

Management raised its 2024 adjusted EBITDA guidance by $100 million to $4.3 billion, at the midpoint of the range, due to better-than-expected results from the Aux Sable acquisition.

It also raised its capital expenditure guidance roughly in line with EBITDA growth of $140 million to $1.3 billion, which will fund the Wapiti Expansion, K3 Cogeneration Facility and other value-added projects in the pipeline segment. As shown below, other projects include the Trans Mountain Expansion, which adds bitumen (asphalt) exports and West Coast LNG exports, driving growth in natural gas and related NGL production.

Importantly, PBA projects are supported by increased producer activity across oil, gas and NGL. As shown below, drilling activity in Alberta and British Columbia in 2024 largely exceeded that of the previous three years.

Meanwhile, PBA is supported by a strong balance sheet with a BBB credit rating from S&P. It has $3.0 billion in liquidity and a relatively low debt-to-adjusted EBITDA ratio of 3.6x, comfortably below the 4.0x level that rating agencies consider safe for midstream companies. On a normalized basis, including the Aux Sable acquisition, management expects the leverage ratio to fall to an even better 3.3x.

Importantly for income investors, PBA currently yields 4.9% and the distribution is well covered by a 73% dividend payout to DCF ratio, leaving room for distribution increases. Remarkably, PBA has maintained and increased its dividend since becoming a public company in 1998.

Finally, PBA remains attractive at its current price of $41.28 and a price-to-cash-flow ratio of 11.2. As shown below, this is the upper end of PBA’s 5-year valuation range.

While the higher valuation may be off-putting to some investors, I believe it is justified given the positive synergies from recent acquisitions and future growth prospects, including management’s guidance for adjusted EBITDA growth of 4% to 6% annually from 2019 to 2026. This growth is a result of the aforementioned synergies from acquisitions, ongoing growth pipelines, and a focus on margin expansion across the business.

With a 5% yield and 5% expected annual EBITDA growth, PBA has the potential to deliver market-beating returns, all with a much higher yield than the S&P 500 (SPY).

Risks to the thesis include commodity price volatility, which could negatively impact producers using PBA assets. Additionally, fluctuations in NGL margins could impact PBA’s profitability in this important segment. Additionally, regulatory and environmental regulations could change the economics of PBA’s infrastructure projects, potentially resulting in cost overruns.

Conclusions for investors

Pembina Pipeline offers a compelling income opportunity with strong business fundamentals supported by fee income, strategic acquisitions and growth projects. The company delivered solid financial results, including 33% year-over-year EBITDA growth and raised 2024 guidance on better-than-expected acquisition synergies. With a healthy balance sheet, low leverage and a 4.9% dividend yield well covered by cash flow, PBA is positioned to deliver potentially rewarding income and long-term total returns.