1 Energy Infrastructure Stock Offering a Unique Opportunity to Play Higher Oil

Boost your portfolio’s growth and income by investing in Pembina Pipeline Corp. (TSX:PPL)(NYSE:PBA).

| More on:
The Motley Fool

Oil’s latest rally, which sees the North American benchmark West Texas Intermediate (WTI) trading at almost US$69 per barrel, its highest price since late 2014, has brought the spotlight firmly back onto Canada’s beaten-down energy patch. While many upstream oil stocks have surged, it is Canada’s energy infrastructure stocks that may present the best opportunity for investors seeking to cash in on the increasingly optimistic outlook for crude.

One of North America’s largest energy infrastructure companies, Pembina Pipeline Corp. (TSX:PPL)(NYSE:PBA), offers a compelling opportunity for investors seeking exposure to higher crude. For the year to date, its stock has pulled back by 11% compared to oil rising by 13%, creating an opportunity for investors. 

Now what?

For 2017, Pembina reported record results. Net earnings almost doubled compared to a year earlier to $891 million, driven by net revenue expanding by 27% and an impressive 40% increase in operating cash flow.

These impressive numbers can be attributed to Pembina completing the $9.7 billion transformative acquisition of Veresen Inc. That deal significantly expanded Pembina’s liquids natural gas pipeline and storage network at time when capacity constraints were weighing on the price of Canadian crude blends. The impact of those capacity constraints will only worsen, as upstream oil producers ramp up production to take full advantage of higher crude.

Any significant increase in oil and other petroleum liquids volumes will cause demand for Pembina’s infrastructure to skyrocket, leading to ever-growing utilization rates and hence higher earnings. Once the acquisition is fully bedded down, it will deliver a range of efficiencies, which will give EBITDA a healthy boost. Even when WTI was trading at around US$60 per barrel, Pembina was forecasting a massive 50% year-over-year increase for adjusted EBITDA during 2018. Now that WTI has raced past the US$65-a-barrel mark, that figure can only grow.

Pembina is not resting on its laurels since completing the Veresen deal. The company has $1.7 billion of projects aimed at expanding its pipeline, processing, and storage capacity. Upon completion, these projects will reduce the capacity constraints impacting Canadian crude prices, while giving Pembina’s capacity, and hence earnings, a healthy boost.

What is particularly appealing about Pembina’s business is that a large portion of its earnings and growth are contractually locked in. That helps to ensure consistent cash flows, while protecting Pembina’s earnings from downturns in the price of crude and natural gas which, in the volatile market environment that now exists, is an important attribute to possess.

Pembina is also focused on maintaining a solid balance sheet to ensure there is ample capacity to finance its growth initiatives and endow it with the flexibility to respond to changes in its operating environment.

So what?

Pembina is among the most attractive, yet less-risky means of playing higher oil prices. That appeal is enhanced by the company’s long history of rewarding investors with a regularly growing dividend. Pembina has hiked its dividend for the last six years straight, giving it a juicy yield of just over 5%. There is every likelihood that as earnings grow because of higher oil and greater demand for its infrastructure that more increases are on the way.

Pembina is an attractive investment for investors seeking growth and regular income, making it a core holding for every portfolio.

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 Matt Smith has no position in any stocks mentioned. Pembina is a recommendation of Dividend Investor Canada.

More on Dividend Stocks

Map of Canada showing connectivity
Dividend Stocks

Trump’s Tariffs: 1 Canadian Stock to Dump and 1 to Buy Immediately

As Trump threatens tariffs on Canada, these are two top stocks to watch.

Read more »

Blocks conceptualizing Canada's Tax Free Savings Account
Dividend Stocks

TFSA: 4 Canadian Stocks to Buy Now and Hold Forever

These top Canadian stocks could give a big boost to your hard-earned TFSA savings in the long run.

Read more »

stock research, analyze data
Dividend Stocks

Prediction: These Could Be the Best-Performing Value Stocks Through 2030

Despite short-term challenges, these top Canadian value stocks could outperform the broader market by a wide margin in the coming…

Read more »

An investor uses a tablet
Dividend Stocks

Where Will BCE Stock Be in 5 Years?

Despite facing big short-term challenges, BCE stock’s strong market position, steady dividend, and long-term vision make it worth watching.

Read more »

A red umbrella stands higher than a crowd of black umbrellas.
Dividend Stocks

Want Safe Dividend Income in 2025? Invest in the Following 3 Ultra-High-Yield Stocks!

The market is full of great income stocks, but this trio can provide growth potential and safe dividend income for…

Read more »

A meter measures energy use.
Dividend Stocks

Power Up Your Defences: Canadian Utility ETFs for Steady Income

It is time to power up your defence strategy to withstand market uncertainty around a looming trade war with Canadian…

Read more »

A train passes Morant's curve in Banff National Park in the Canadian Rockies.
Dividend Stocks

What to Know About Canadian Railway Stocks for 2025

The Canadian National Railway (TSX:CNR) isn't the only railroad stock in town.

Read more »

monthly desk calendar
Dividend Stocks

Top Canadian Stocks to Buy for Monthly Income

Looking for some stocks to buy for monthly income? Here's a pair of great stocks that can provide both income…

Read more »