Pipelines have become a huge topic across Canada. With the prospect of tariffs from the U.S., Canada is aware of its need to get its energy to new markets. That could be a great opportunity for Canada’s top energy infrastructure companies.
Source: Getty Images
Pembina Pipeline: An energy giant in Western Canada
One company that stands out is Pembina Pipeline (TSX: PPL). It has a market cap of $29 billion. It is not the largest energy infrastructure play in Canada, but there are reasons why it might be preferred over other Canadian infrastructure stocks.
A diverse asset base
Firstly, Pembina has a great mix of assets. It has the assets Western Canadian energy producers need to get their energy to market. It has collection pipelines, natural gas processing and fractionation, storage, export terminals, and egress pipelines.
Given how crucial its assets are, over 80% have long-term contracts. This helps provide a stable and predictable stream of baseline cash flows to the business. The contracted business helps offset the variability from energy commodity pricing.
While it does have commodity exposure from its marketing business, any upside in energy prices go to the bottom line. This energy infrastructure player is not dependent on energy prices to succeed.
A resilient dividend
Secondly, Pembina has an incredibly resilient dividend. PPL stock yields 5.6% today. It’s an attractive rate for such a high-quality business. Pembina’s dividend is widely supported by its fee-based earnings alone. Its payout ratio sits at 48%, so it has a wide margin of safety.
It even maintained its dividend in 2020, even when energy prices turned negative. Since 2020, Pembina has delivered modest annual dividend growth (3–5% per year).
Growth to come from LNG
Thirdly, Pembina has an attractive growth pipeline. It has commenced construction on the Cedar Liquified Natural Gas (LNG) export terminal in Kitimat, B.C. This will be one of only a few approved LNG terminals that is in construction. The company has already seen strong demand from energy suppliers to contract their output to Asian markets.
Pembina has a great record of executing projects on time and on budget. This massive project is likely to be the same. The best part is that Pembina plans to build Cedar without any equity dilution. Despite its growing dividend and list of capital projects, it expects to fund its growth with modest debt and internally generated cash flows.
Pembina has one of the best balance sheets in the energy infrastructure business. Its debt-to-earnings before interest, tax, depreciation, and amortization (EBITDA) ratio sits at around 3.5 times.
Many peers trade at more than 4–5 times debt-to-EBITDA. As a result, it can afford to increase its debt levels for essential projects like Cedar LNG. Once Cedar comes online, its leverage will likely pull back quickly as that asset begins generating strong free cash flows.
Attractive valuation for an energy infrastructure stock
Pembina trades for an enterprise value-to-EBITDA of 10.5. That is two churns lower than Enbridge and TC Energy. Yet, it has a better balance sheet and more attractive long-term growth prospects. Historically, PPL traded on par with these peers. If it can continue to execute its growth plan, there is no reason it shouldn’t trade up a turn or two.
For a steady business with an attractive dividend, Pembina Pipeline is a top energy infrastructure stock. As Canada looks for new egress alternatives, it is in a prime position to continue growing its base of essential energy infrastructure assets.
