The Canadian equity markets are witnessing a solid uptrend, with the S&P/TSX Composite Index making new highs on Tuesday. Easing trade tensions and the expectation of interest rate cuts by the United States Federal Reserve amid weak economic numbers continue to drive the Canadian equity markets higher.
However, Pembina Pipeline (TSX: PPL) has failed to participate in this rally and trades at a 14% discount compared to last year’s high. Trade tensions, lower-than-expected first-quarter performance, and an uncertain economic outlook amid protectionist policies appear to have weighed on investors’ sentiments, dragging its stock price down. However, the correction offers an excellent buying opportunity for long-term investors, given its healthy long-term growth potential, reasonable valuation, and consistent dividend payouts.
Meanwhile, let’s look at its first-quarter performance in detail.
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Pembina Pipeline’s first-quarter performance
Pembina Pipeline owns and operates a pipeline network that transports oil and natural gas products produced predominantly in Western Canada. It also has a strong presence in gas gathering, fractionation, storage, and propane exporting businesses. Earlier this month, the Calgary-based pipeline company reported a mixed first-quarter performance, missing revenue expectations but surpassing EPS (earnings per share) expectations.
Its topline came in at $2.3 billion, below analysts’ expectations of $2.4 billion. However, year-over-year, its topline grew 48.2% amid strong performance across pipeline, facilities, and marketing and new ventures segments. The company’s Pipelines and Facilities divisions witnessed a year-over-year increase of 9% in their volumes to 3.7 million BOE/d (barrels of oil equivalent per day). The acquisition of Alliance Aux Sable, volume growth across the Nipisi Pipeline and the Peace Pipeline system, and higher volumes at its Pembina Gas Infrastructure due to the Whitecap and Veren transactions supported Pembina’s volume growth.
Meanwhile, the company’s adjusted EBITDA (earnings before interest, tax, depreciation, and amortization) and EPS grew 11.8% and 9.6%, respectively. Its EPS of $0.80 surpassed analysts’ expectations of $0.75. The company also generated $840 million of cash from its operating activities. Meanwhile, its adjusted cash flows from operating activities stood at $777 million, slightly lower than its previous year’s quarter of $782 million. Now, let’s look at its growth prospects.
Pembina Pipeline’s growth prospects
Pembina has consistently delivered its projects safely within the stipulated time and budget, thus strengthening its position. The company is constructing $4 billion worth of projects, while another $4 billion is under development. So, these investments could support robust production activities in Alberta and British Columbia.
Moreover, Pembina has acquired a 50% stake in the Greenlight Electricity Centre Limited Partnership, which focuses on developing power-generating facilities to serve data centre customers. It has also secured exclusive NGL (natural gas liquids) extraction rights from the Yellowhead Mainline natural gas pipeline and is building a 500 million cubic feet per day straddle facility. The company’s financial position also looks healthy with a debt-to-adjusted EBITDA multiple of 3.5 and liquidity of $2.1 billion.
Investors’ takeaway
Pembina operates a diversified and regulated energy business, generating 80–90% of its cash flows from fee-for-service, take-or-pay, and cost-of-service contracts. So, its financials are less prone to commodity price fluctuations and market volatility, delivering reliable cash flows and facilitating consistent dividend growth. Over the last 10 years, the company has increased its dividends at a 5% CAGR (compound annual growth rate) and currently offers a juicy forward dividend yield of 5.4%. Amid the recent pullback, the company’s valuation looks reasonable, with its NTM (next 12 months) price-to-sales multiple standing at 3.3.
Considering all these factors, I believe long-term investors should utilize the pullback in this pipeline company to accumulate the stock and earn superior returns.
