Down by 15%: Is Pembina Pipeline Stock a Buy in July 2023?

A discounted energy stock may not garner as much attention as a discounted stock from another sector due to market uncertainty.

Adam Othman

Adam is a value investor who is always on the hunt for fantastic undervalued companies that he can share with Motley Fool readers. He follows Warren Buffett and Charlie Munger's investment advice and has completed the Canadian Securities Course. When he's not investing, Adam can usually be found traveling or skiing.

Published July 18, 2023 2:45 pm EDT

After a glorious post-pandemic rally, the energy sector in Canada has become relatively stagnant since mid-2022. The S&P/TSX Capped Energy Index has only gone up by about 12.8% in the last 12 months, though it has fluctuated throughout this period, going as high as 34.5% in one bullish phase and falling over 20% in a slump.

The effect has permeated the entire sector, even the relatively safe energy transportation companies/midstream companies like Pembina Pipeline (TSX: PPL).

oil and gas pipeline — Image source: Getty Images

The company

Pembina is not the first name that comes to mind when investors think about a pipeline giant in Canada, but it’s a leader in its own right and can be counted among the blue-chip stocks in the country. It operates a considerable network of pipelines across North America. The 18,000 kilometres pipeline is capable of transporting light oil, oil sands, and heavy oil across multiple regions in North America.

Energy transportation is the core of Pembina’s midstream business, but it operates in other dimensions/domains as well. It also has a 60% stake in a comprehensive natural gas processing and natural gas liquids (NGLs) production facility in Western Canada, capable of producing about five billion cubic feet of natural gas per day.

The company has also proposed two projects to the relevant entities that, if approved, may help the company pursue fresh growth opportunities.

The stock

Pembina Pipeline stock has been more stable compared to the rest of the sector in the past decade. Even though it fell hard in 2014 with the rest of the sector, the company managed to regrow to its peak valuation before the 2020 market crash. Despite its relative stability, the stock experienced a massive crash in 2020 and fell roughly 56% in a matter of months.

However, the company displayed its commendable recovery potential again, and by June 2022, it had recovered almost all of the valuation it had lost during the crash. It has started slumping again from that peak point and has lost over 15% of its valuation this year alone (from its mid-Jan. peak), but that can be chalked off to the uncertainty in the market.

A discounted energy stock may not garner as much attention as a discounted stock from another sector due to energy market uncertainty. But considering the business model of Pembina, its recovery potential, and its history as a Dividend Aristocrat, it seems like an attractive buy thanks to the combination of a modest discount and consequential dividend yield rise.

The 6.5% yield is an incredibly attractive number in its own right, but the stock can be considered attractive from a valuation perspective as well.

Foolish takeaway

Pembina stands out as a viable choice, even when compared to more heavily discounted energy stocks. It’s more stable as a pipeline stock — a notion that is endorsed by its recovery after the past slumps. The dividends are far more financially stable as well, considering a healthy payout ratio of 52%.