Upstream energy stocks are cyclical, as their earnings and cash flows are directly tied to oil prices. But mid-stream companies such as Pembina Pipeline (TSX:PPL) are relatively immune to fluctuations in commodity prices as cash flows are generally tied to long-term contracts.
Due to the predictable nature of its cash flows, Pembina Pipeline was among the few TSX energy stocks that maintained dividend payouts even amid the COVID-19 pandemic. Currently, Pembina Pipeline pays shareholders an annual dividend of $2.67 per share, translating to a forward yield of 6.4%. Here’s how Pembina Pipeline can afford its tasty dividend yield.
Is Pembina Pipeline stock a good buy?
Pembina Pipeline is engaged in the provision of midstream and transportation services. The Pipelines business includes oil sands and transmission pipeline systems, crude oil storage, and related infrastructure.
The Facilities segment consists of processing and fractionation facilities that provide customers with natural gas and natural gas liquids (NGL) services. Pembina also has a Marketing and New Ventures segment, which includes value-added commodity and marketing activities.
In Q2 2023, Pembina reported earnings of $363 million and adjusted EBITDA (earnings before interest, tax, depreciation, and amortization) of $823 million. Its debt-to-EBITDA multiple stands at 3.5 times, and the company expects to end the year with a ratio of 3.4 to 3.6 times.
In the June quarter, Pembina reduced consolidated debt by $450 million by using the proceeds from the sale of its interest in the Key Access Pipeline System and operating cash flows.
Results in Q2 reflect the resiliency of Pembina’s pipelines as it benefits from growth in volumes, improved tools on certain systems, and increased contribution from the crude oil marketing segment. This growth was offset by seasonality in Pembina’s natural gas liquids marketing business and lower NGL prices in Q2.
Results in the June quarter were hit by wildfires in Alberta and British Columbia, which impacted Pembina’s customer operations. Further, third-party outages and reduced operating pressure on the Northern Pipeline system negatively impacted EBITDA by around $23 million, while revenue deferrals and costs may have reduced EBITDA by $21 million.
What is Pembina’s dividend growth rate?
Pembina is an integrated midstream infrastructure company with a portfolio of “difficult-to-replicate assets,” providing it with a competitive advantage. Its low-risk business model delivers resilient and growing cash flows resulting in consistent dividend increases. In the last 15 years, dividend payouts have increased at an annual rate of 4.3%.
With a payout ratio of less than 60%, Pembina Pipeline’s dividend is sustainable, with enough room to increase it in the future.
Despite a sluggish macro environment, Pembina Pipeline expects pipeline volumes to grow between 4% and 6% annually. Moreover, 70% of its cash flows are backed by take-or-pay contracts allowing it to generate steady cash flows even in an uncertain economic backdrop. Over 80% of its EBITDA is fee-based across 200 counterparties.
Pembina Pipeline continues to optimize its pipeline capacity and operations while constructing cogeneration facilities, both of which should positively impact cash flows and profitability.
Priced at 14.8 times forward earnings, PPL trades at a cheap valuation and is priced at a discount of 20% to consensus price target estimates.
