Ongoing weakness in oil markets, combined with an NDP win in Alberta, has many investors steering clear of anything connected to western Canadian oil and gas production.

Producers are being shunned and the pipeline companies that carry their products to market are also getting the cold shoulder.

Pembina Pipeline Corp. (TSX:PPL)(NYSE:PBA) is a key transportation and midstream service provider operating primarily in western Canada and North Dakota. Most investors turn to Pembina’s larger peers when they choose a pipeline stock, but many don’t realize that Pembina plays a critical role in the distribution of Canadian hydrocarbons.

In fact, the company moves almost all of British Columbia’s conventional oil and condensate production, roughly 50% of Alberta’s conventional oil output, and a full 30% of the natural gas liquids being produced in all of western Canada.

Let’s take a look at the current situation to see if Pembina deserves to be in your portfolio.


In its Q1 2015 earnings statement, Pembina reported earnings of $0.32 per share compared with $0.44 per share in Q1 2014.

Low NGL commodity prices hit the company’s midstream operations pretty hard. Crude oil, butane, propane, and condensate prices all traded at much lower levels compared with last year and net revenues in the midstream segment dropped from $236 million to $113 million.

The biggest culprit was a 50% drop in the price of propane.

The company’s conventional pipelines and gas services operations fared much better, with year-over-year revenue increases of 32% and 29%, respectively.

Capital projects

Pembina currently has $5.9 billion in secured and committed projects under development. The company expects about $1.3 billion to go into service in 2015, $935 million in 2016, and $3.6 billion in 2017.

Pembina continues to de-risk its business by moving more revenue to fee-for-service contracts, targeting 80% by 2018. This is important for investors because the company will be less exposed to volatility in commodity price, and revenue streams should be more predictable. That should be good news for the dividend.

Dividend growth

Despite the weak Q1 numbers, management just increased the dividend by more than 5% to an annualized payout of $1.83 per share. This yields about 4.5%. Investors should see the move as a sign that cash flow growth is expected to accelerate. As new assets go into service in the next three years, revenues will increase and Pembina should continue to return more cash to shareholders.

Should you buy?

Pembina trades at 2.5 times book value and 21 times earnings, which are attractive stats compared with the five-year average. Demand for the company’s services should continue to grow in the coming years. As a long-term bet, Pembina should be a solid dividend pick at the current price.

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Fool contributor Andrew Walker has no position in any stocks mentioned.