4 Reasons to Make Pembina Pipeline Corp. Your Top Energy Stock Pick

Pembina Pipeline Corp. (TSX:PPL)(NYSE:PBA) is one of the top long-term plays in the energy sector for four reasons. Should you initiate a position today?

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Pembina Pipeline Corp. (TSX:PPL)(NYSE:PBA), one of the leading transportation and midstream service providers to North America’s energy industry, has watched its stock take a beating in 2015. It has fallen more than 27%, but I think it is at or very close to its bottom and represents a great long-term investment opportunity today.

Let’s take a look at four of the primary reasons why I think the stock will head higher from here and why you should buy it today.

1. Its strong Q3 results could support a near-term rally

On November 5 Pembina released very strong earnings results for its third quarter that ended on September 30, 2015. Here’s a summary of eight of the most notable statistics from the report compared with the year-ago period:

  1. Net earnings increased 50.7% to $113 million
  2. Earnings per share increased 45% to $0.29
  3. Revenue decreased 29% to $1.03 billion
  4. Net revenue increased 4.5% to $374 million
  5. Total pipeline throughput volume increased 5.1% to 1,704,000 barrels of oil equivalent per day
  6. Operating profit increased 2.7% to $271 million
  7. Earnings before interest, taxes, depreciation, and amortization increased 15.1% to $229 million
  8. Adjusted cash flow from operating activities increased 32.3% to $209 million

2. Its stock trades at inexpensive forward valuations

At today’s levels, Pembina’s stock trades at just 28.6 times fiscal 2015’s estimated earnings per share of $1.07 and only 22.2 times fiscal 2016’s estimated earnings per share of $1.38, both of which are inexpensive compared with its trailing 12-month price-to-earnings multiple of 32.3 and its five-year multiple of 32.6.

With the multiples above and its estimated 11.6% long-term earnings growth rate in mind, I think Pembina’s stock could consistently command a fair multiple of at least 30, which would place its shares upwards of $41 by the conclusion of fiscal 2016, representing upside of more than 33% from current levels.

3. It has a high dividend and is dividend-growth play

Pembina pays a monthly dividend of $0.1525 per share, or $1.83 per share annually, which gives its stock a 6% yield at today’s levels. It is also very important for investors to note that the company has raised its dividend for four consecutive years, and its ample cash flow from operating activities could allow this streak to continue in 2016.

4. Its new assets will be catalysts for growth

In the third quarter Pembina placed two new gas plants, a gathering pipeline, and a natural gas liquids pipeline expansion into service. In the quarterly report, Scott Burrows, Pembina’s chief financial officer, also stated that the company “will be bringing new assets into service almost every quarter for the next two years–all of which will help drive shareholder value.”

Mr. Burrows then provided further details on upcoming asset launches, which includes a fractionator, contracted cavern, multiple pipeline laterals, and a truck and rail expansion, all of which are expected to be placed into service by the end of the first quarter of fiscal 2016.

Like Mr. Burrows stated, these new assets will help drive shareholder value, because they will increase the company’s fee-for-service cash flows, which it can then use to bring more assets online and to continue to increase its dividend.

Is Pembina the missing piece to your portfolio?

I think Pembina Pipeline represents one of the best long-term investment opportunities in the energy sector today, so all Foolish investors should strongly consider beginning to scale in to positions over the next couple of weeks.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium service or advisor. We’re Motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer, so we sometimes publish articles that may not be in line with recommendations, rankings or other content.

Fool contributor Joseph Solitro has no position in any stocks mentioned.

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