TD Waterhouse Commenets
Pembina Pipeline Corp.
(PPL-T, PBA-N) C$42.09 | US$33.81
Q3/21 Results Benefit from Termination Fee Payment
Event
Pembina Pipeline Corp. (PPL) reported Q3/21 AFFO/share of $1.43, above our estimate of $1.02, recent consensus of $1.03, and Q3/20 AFFO/share of $0.95.
Impact: SLIGHTLY POSITIVE
Q3/21 Results: Pembina's results chiefly benefited from recognition of the $350 million IPL transaction termination payment, which we had not included in our AFFO calculation. Absent this, and adjusting for the related tax and advisor fee payments, PPL's results would have been slightly below our estimate. However, we overserved optimism from management in growing fee volumes and the favourable commodity-price environment that is expected to continue to benefit PPL for the rest of the year and into 2022.
GHG Reduction Targets: Before the quarter, PPL announced its intention to reduce the emission intensity of its business by 30% relative to 2019 baseline emissions. Pembina will initially focus on operational opportunities to increase its utilization of renewable and low-emission energy sources.
Polyethylene Opportunity: Pembina highlighted the recent announcement by Dow Chemical Co. to construct a new net-zero polyethylene cracker in Fort Saskatchewan, AB. Pembina estimates that the facility will call for an additional 100,000 bbl/d of Ethane feedstock from third-party service providers like PPL.
Short-term Capacity Contracting at Alliance: The company commented that a recent open-season at Alliance was nearly three times over-subscribed, signalling an improving commercial environment for this asset. The company noted that 2023 gas-year contracting is currently underway, with an update expected by year[1]end.
Updated Target Price: We have made some small adjustments to our long-term outlook and updated our model to reflect the Q3/21 results. The net effect of our changed outlook is that our target price has increased by $2.00 to $45.00.
TD Investment Conclusion
PPL's operations are well-positioned to benefit from strong industry tailwinds, including capturing growing volumes in WCSB, as well as likely provide opportunities to invest in value-chain extension and expansions into new markets. We believe that PPL's proposed market access and carbon-storage initiatives demonstrate the company's ability to pivot towards a lower-carbon-energy future.
Outlook
GHG Reduction Targets and Sustainability Update: On October 20, 2021, PPL announced its GHG emissions intensity target for 2030, along with the release of the company’s annual sustainability data update. PPL has set a target to reduce GHG emissions intensity by 30% by 2030 relative to 2019 emissions and has identified several operational initiatives as well as renewable energy and low-carbon projects that will allow the company to reach its target. Operational initiatives, which will also lower operating costs and increase efficiencies, include optimizing pipeline capacity and operations, constructing cogeneration faculties, modernizing and optimizing compressing facilities, and investing in technologies that focus on leak detection as well as flaring and venting reduction. Management highlighted recently announced projects such as the Alberta Carbon Grid and the Garden Plain Wind Power Project, as well as potential CCUS investments in its own gas-processing and fractional facilities that represent strong business opportunities and share the same goal of reducing GHG emissions. As a part of its sustainability data update, the company emphasized its Total Recordable Injury Frequency score relative to the industry average, as well as its community investment program.
Strong Pricing Environment Expected to Persist: Pembina highlighted its view that underinvestment among its producer customers continues to be the driving force of strong natural-gas and NGL prices. The company believes that these conditions will persist in 2022 and allow PPL to maintain above-average contribution from its marketing businesses. The company has hedged approximately 50% of its frac spread exposure, excluding Aux Sable.
Q4/21 Preview: We forecast Q4/21 AFFO/share of $1.04, which is below the Q4/20 AFFO/share of $1.10. We expect modest growth across all segments, reflecting a recovery in industry volumes and pricing, as well as incremental contribution from growth projects placed in service over the previous 12 months, to be more than offset by lower distributions from equity investees, higher cash interest paid, and other select corporate costs.