Pembina Pipeline Has an “Attractive Risk-Reward Profile”

RBC Dominion Securities analyst said Pembina Pipeline Corporation (TSX:PPL) took swift and decisive action to protect the balance sheet and dividend

Capital Ideas Media | July 3, 2020 | SmallCapPower: Capital Ideas Media Publisher Mark Bunting wrote: Where to hide out for some steady growth and dividend payments while the world muddles its way through the COVID-19 pandemic.

(Originally published on Capital Ideas Media on May 19, 2020)

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How about Pembina Pipeline Corporation (TSX:PPL) (NYSE:PBA), which has an “attractive risk-reward profile with a big focus on risk mitigation,” according to RBC Dominion Securities analyst Robert Kwan.

Kwan maintained his “outperform” rating in a recent report and hiked the target on Pembina to $40 ($55 under a blue sky scenario) from $26, giving the stock about 22% upside, not including the current dividend yield of 7.7%.

Pembina’s stock was hammered down to 2012 levels during the market crash in March and is now trading around four-year lows.

Kwan said Pembina is attractive compared to its Western Canadian Sedimentary Basin (WCSB) midstream peers:

Although other WCSB-focused midstream peers may have greater upside potential in a market recovery, we believe that the market is also very focused on risk mitigation/downside protection.

On that front, we think that Pembina gets a lot of credit for being well-ahead of its peers with respect to taking swift and decisive action to protect the balance sheet and dividend.

Pembina decided to materially cut its growth capital expenditure (i.e., the ‘nice to do’ projects) and make it clear to the market that it is willing to make the hard decisions to protect the dividend.

A well-covered dividend with solid liquidity

Pembina has a strong liquidity position with $2.5 billion of available cash and borrowing capacity on its credit lines, which easily covers the new $0.9–1.1 billion capital plan and a paltry $73 million of debt maturities in 2020. This does not even include excess cash flow over and above the dividend that we estimate amounts to just under $1 billion.

Potential catalysts

M&A creating a bid in the sector; improved investor sentiment towards energy and midstream stocks; additional volumes for the conventional pipeline system; government programs that strengthen oil and gas producing customers; increased Montney producer activity on the back of the sanctioning of the third-party LNG Canada project.

Valuation

For much of the past 15 years, Pembina’s shares have traded in a range of roughly 10-13x EBITDA. We believe a valuation in the lower half of the range is appropriate given the continued uncertainty with respect to energy markets.

However, we continue to see significantly higher long-term value in the shares, which is reflected in our “Upside Scenario” of $55 a share that is based on our price target from before the March 2020 market downturn with that valuation including projects that are currently mothballed.

Disclosure: RBC Capital markets received compensation from Pembina Pipeline for investment banking services within the past 12 months.

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