Additional RBC comments on IPL
Inter Pipeline saga comes to an end although NGL assets might still be in play
Discipline nets a $350 million break fee. As previously noted, we positively view Pembina exercising discipline and walking away from the Inter Pipeline process on July 25, resulting in the company receiving a $350 million break fee following the termination of the arrangement agreement with Inter Pipeline. On the use of the proceeds, management commented that it is contemplating options that include funding growth, repaying debt, or repurchasing shares. Although Pembina has a normal course issuer bid, we think a material share repurchase is unlikely given the potential opportunities for new projects and/or asset acquisitions (with related funding requirements), particularly if BIP completes the acquisition of Inter Pipeline.
We think Pembina remains a natural owner for certain Inter Pipeline assets. Between Pembina previously highlighting the “industrial logic” for the combination of “certain” Pembina and Inter Pipeline assets and Brookfield Infrastructure Partners (BIP) previously noting that it approached Inter Pipeline’s board with a proposal to split up the assets, as well as having expressed interest in “certain lower risk, lower return assets" (which we believe to refer primarily to the oil sands pipelines), we continue to think there is a strong possibility that some of Inter Pipeline’s assets could be put up for sale. Given the significant direct and indirect commodity exposure that comes with many of Inter Pipeline's assets (i.e., uncharacteristic of BIP’s strategy), we expect Pembina could take a hard look at some of the NGL assets, including the Heartland Petrochemical Complex, Redwater or Cochrane. We also highlight that with Pembina having recently completed due diligence on the assets through its process with Inter Pipeline, it may be in a position to move relatively quickly on a transaction, which may be attractive to BIP if it is looking to quickly reduce its risk/exposure.
Acquisitions remain a potential avenue for growth. Pembina noted its disappointment with the result of the Inter Pipeline process, but stated that it “continues to seek opportunities for growth through focused acquisitions”. While we think this comment was likely inspired to a degree by Inter Pipeline assets that may come up for sale, we also think Pembina remains active in evaluating other potential opportunities. Management further stated that there are no “imminent or specific targets”, but that “acquisitions have been part of Pembina's success story over many years and will continue to be”, and that it will “remain disciplined, prioritizing shareholder returns and [its] financial guardrails”.