BMO's Ben PhamJuly 27, 2021 | 11:09 ET | 11:09 ET~ Pembina Pipeline PPL-TSX Rating Market Perform Price: Jul-26 $41.03 Target ↑ $41.00 Total Rtn 6% Resuming Coverage Following Termination of IPL Deal; Target to $41 vs. $39 Bottom Line: While the Inter Pipeline (IPL, Restricted) acquisition would have resulted in accelerated dividend growth coupled with enhanced scale and growth optionality, key here is that the termination highlights management's capital allocation discipline and results in a $350M break fee that it could redeploy into an already robust stand-alone unsanctioned growth roster. Given the improved commodity price environment (target multiple to 11.5x vs. 11x EBITDA) and the recent sanctioning of Phase IX while we were on restriction, our target goes to $41 vs. $39. Reiterate Market Perform rating on relative return. Key Points Terminates IPL acquisition. On July 26, PPL terminated its arrangement agreement to acquire IPL. This was in response to IPL no longer supporting PPL's proposed offer following a superior alternative bid. As such, PPL will be receiving a $350M termination fee (~$0.63/sh). Management highlighted that it will continue to seek acquisitions to supplement growth and remains focused on executing on the ~$1B of sanctioned projects through 2023. Still lots of growth optionality. While PPL management is disappointed with the outcome, key here is that the company still has a rich opportunity set of prospective development projects totalling ~$6B in various stages of development which are still absent from our valuation. These include: (i) the reactivation of Peace Pipeline Phase VIII; (ii) the Alberta Carbon Grid in partnership with TRP; (iii) the $3B Cedar LNG project in partnership with the Haisla nation; and (iv) various other high-return, low capital intensive expansions across its integrated asset base (i.e., Redwater IV, Cochin expansion, Edmonton terminal, pipeline laterals). We note that every additional $1B deployed translates into ~$1.50/sh of upside optionality or ~4%. Slightly revised estimates. Our Q2/21 EBITDA is slightly revised to $829M (vs. $830M) as a higher expected Marketing contribution on continued robust frac spreads (to $70M EBITDA vs. $50M) is largely offset by Corporate expense friction (to -$50M vs. -$43M) and lower Pipelines segment EBITDA as we more properly model the recognition of deferred take-or-pay revenues (to $535M vs. $549M). As such, our 2021 adj. EBITDA is now $3,338M (vs. $3,339M) and firmly within $3.2-3.4B guidance, while our 2022 moves to $3,305M (vs. $3,306M).