TD Increases target price to $45.00 (full comments)
Pembina Pipeline Corp.
(PPL-T, PBA-N) C$42.43 | US$33.39
Q4/21 Results
Event
Pembina Pipeline Corp. (PPL) reported Q4/21 AFFO/share of $1.33, above our estimate of $1.04, recent consensus of $1.12, and Q4/20 AFFO/share of $1.10
Impact: SLIGHTLY POSITIVE
Strong End to the Year: Fourth-quarter results exceeded our expectations, largely due to a strong Marketing contribution, with higher NGL and crude-oil prices bolstering margins and a higher contribution from Aux Sable. The Facilities Division also benefited from new facilities, higher volumes, and a realized gain on commodity-related derivatives for certain gas-processing fees tied to AECO prices. This was partially offset by lower Pipeline Division contributions from a combination of factors, including declines in Ruby Pipeline, contract expirations at the Nipisi and Mitsue pipelines, and lower volumes on Cochin. Full-year adjusted EBITDA exceeded the high end of the company's guidance range.
Share Repurchase Underway: In Q4/21, PPL repurchased $17mm of common shares, which progresses the company's intentions of allocating up to $200mm of excess cash flow to buybacks by mid-2022. With its partner TRP, on February 1, 2022, PPL submitted a proposal for the Alberta Carbon Grid in response to the Alberta government's request for a full proposal.
Financial Forecasts Updated; Target Price Rolled Forward: We have updated our model for the current quarter, along with making a few small changes to our modelling assumptions, including stronger margins in 2022. Additionally, we have rolled forward our target-price valuation to be based fully off of our 2023 estimates, and when combined with our updated outlook, results in our target price increasing by one dollar to $45.00.
TD Investment Conclusion
PPL's commitment to executing on its espoused strategy within its financial guardrails during its senior-leadership transition is foundational to our thesis on the stock. We also continue to view PPL's operations as well-positioned to benefit from industry tailwinds, including capturing growing volumes in WCSB, as well as likely providing 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.
Pipelines Division:
The segment delivered ~$2.1bn in adjusted EBITDA in 2021, down 5% from ~$2.2bln in 2020. The decline was largely due to lower contribution from the Ruby and Vantage pipelines, lower Oil Sands revenue, as well as higher non-recoverable operating costs. Additionally, lower foreign-exchange rates negatively affected results for the year, compared with the previous period. This was partially offset by higher volumes from the Peace Pipeline system.
Facilities Division:
The segment reported a 2021 adjusted EBITDA of ~$1.1bln, up 8% from the ~$1.0bln reported in 2020.The increase was driven by the contribution from assets placed into service during the year, higher revenue at the Redwater Complex, and realized gains on commodity-related hedges, partially offset by greater operating costs and long-term incentive expenses.
Marketing and New Ventures Division:
MNVD reported a 2021 adjusted EBITDA of $420mm, up 118% from $193mm in 2020. The y/y increase was driven by higher sales margins on NGL and crude oil, supported by higher commodity prices, and a larger contribution from Aux Sable. This was partially offset by higher realized losses on commodity-related derivatives.
Outlook
Corporate Developments:
On February 23, 2022, Scott Burrows was appointed as the company’s President and CEO; previously, he had been the CFO for seven years and in that capacity, contributed to shaping the corporate strategy. PPL also announced the appointment of Jaret Sprott to the role of Senior Vice President & Chief Operating Officer and Eva Bishop to the role of Senior Vice President, Corporate Services. Cameron Goldade continues to serve as interim CFO as the Board continues to evaluate internal and external candidates.
On the company’s conference call, the new President and CEO confirmed that there would be no changes in the company’s existing corporate strategy and strategic direction. Returning capital to shareholders via dividends will remain a priority and management believes that shareholder value can readily be created by funding accretive organic and brownfield growth opportunities. Should there be a deceleration in the company’s organic growth profile, management would consider repurchasing shares or repaying debt, depending on share-price movement and company leverage metrics.
Business Update:
Management highlighted that it continues to see strong performance and efficient operations at the Prince Rupert Terminal and the company is on track to decide whether to proceed with the expansion project in Q1/22.
A wholly owned subsidiary of Ruby has US$475mm of senior notes outstanding, which is due April 1, 2022. Although PPL does not expect the subsidiary to have adequate liquidity to retire the senior notes at maturity, management noted that it is working together with the pipeline’s co-owner, Kinder Morgan Inc., to arrive at a solution in a timely manner.
Contract expirations occurred in Q4/21 for the Nipisi Pipeline system and the Mitsue Pipeline system, which previously operated under 10-year fee-for-service agreements that included substantial take-or-pay components. On the company’s conference call, management described both pipeline systems as well-maintained high-integrity assets and that it will continue to explore different commercial solutions that would enable re[1]contracting of the pipelines.
Q1/22 Preview:
We are forecasting Q1/22 AFFO/share of $1.16, which is above the Q1/21 AFFO/share of $1.06. We expect continued strength in marketing margins, continued recovery in industry volumes and pricing, as well as incremental contribution from growth projects placed in service over the previous 12 months.
Valuation
PPL is trading at 10.7% 2022E AFFO Yield, higher than its historical five-year average of 10.2% and its midstream peer-group average of 10.0%.
Key Risks to Target Price
Key risks to our target price include: 1) Higher-than-expected bond yields; 2) acquisitions that do not create shareholder value; 3) regulatory risk; 4) operational disruptions and environmental incidents; 5) commodity price risk; 6) toll disputes; 7) substantial delays and/or cancellations of oil sands projects; 8) access to capital markets; 9) competition/market share; 10) changes in production and export volumes of natural gas in western Canada; 11) reliance on key customers; 12) capital cost and construction risk; 13) project development risk; 14) WCSB risk; and 15) COVID-19 impact.