RBC Target Price and Upside Scenario
Valuation
Our $48.00/share price target is based on an EV/EBITDA
multiple of 11.5x and includes no upside from the mothballed
growth initiatives. For much of the last 15 years, Pembina’s
shares have traded within a range of roughly 10–13x EBITDA.
We believe a valuation at the mid-point of the range
is appropriate given the improving market fundamentals,
particularly in Western Canada. We believe that the relative
risk-adjusted expected total return to our price target
supports our Outperform rating on the shares.
Upside scenario
Our $55.00 per share upside scenario is based on a 1x
premium to our base valuation (resulting in EV/EBITDA being
at the upper-end of the 15-year range) plus roughly $1.00/
share for deferred projects that have been mothballed in the
current environment but could move forward in the future.
The EV/EBITDA valuation is modestly higher than the group
average, reflecting the high proportion of cash flow derived
from the NGL pipeline and terminal infrastructure, primarily
under take-or-pay contracts.
Investment summary
We expect Pembina’s shares to outperform its peers for the
following key reasons:
• Growing WCSB volumes should drive higher EBITDA.
Whether it be uncontracted capacity or within its contract
structures that blend minimum take-or-pay levels with feefor-
service upside as volumes grow, we expect Pembina
to benefit from growing gas and liquids volumes in the
Western Canada Sedimentary Basin (WCSB), particularly
with its assets levered to the Montney, Duvernay and Deep
Basin.
• We expect growing volumes to also drive new projects
underpinned by take-or-pay contracts. We expect growing
volumes to result in contracted infrastructure opportunities,
evidenced by the re-activation of the Phase IX expansion,
some of which could be announced by the end of 2021.
New projects could include previously mothballed initiatives
including the Phase VIII pipeline expansion or the Prince
Rupert Terminal expansion.
• Solid base of business with a commodity kicker. Although
the hedge book was prudent risk management for 2021, it
has resulted in a substantial reduction from margins based
on spot commodity prices. However, hedge disclosures as
part of the Q2/21 results lead us to believe that hedging
losses booked in 2021 should reverse in 2022 assuming
constant commodity prices/spreads.
• Potential catalysts. Improved investor sentiment towards
energy and midstream stocks; additional volumes for the
conventional pipeline system; government programs that
strengthen oil and gas producing customers; increased
Montney producer activity on the back of the sanctioning of
the third-party LNG Canada project.
Risks to rating and price target
Risks to our price target and rating include: (1) the impact of
COVID-19 and a weak market for energy including lower-thanexpected
throughput on the pipeline systems, (2) regulatory
intervention, (3) the ability to complete new projects on time
and on budget, (4) operational issues, (5) reduced margins in
the midstream and marketing segment, and (6) acquisitions,
investments and/or projects that fail to gain the confidence of
investors.