TD Waterhouse Comments / Target now $48.00Pembina Pipeline Corp.
(PPL-T, PBA-N) C$44.08 | US$34.56
Resuming Coverage: Joint Venture with KKR & Co. Inc.
Event
We are off restriction following the March 1, 2022 announcement where Pembina Pipeline Corporation (PPL) have entered into definitive agreements with KKR & Co. Inc. (KKR) to combine their respective western Canadian natural gas processing assets to a new joint venture entity (Newco).
Impact: SLIGHTLY POSITIVE
Transaction Details: Upon closing of the transaction, PPL and KKR's global infrastructure funds will own 60% and 40% of Newco, respectively, and PPL will act as the operator and manager of the entity. Assets contributed to Newco include PPL's field-based natural gas processing assets, the Veresen Midstream business, and the 49% interest in Energy Transfer Canada (ETC) currently owned by funds managed by KRR. Simultaneously with closing of the joint venture transaction, Newco will acquire the remaining 51% ownership interest in ETC from Energy Transfer LP. Excluding value of assets under construction, the ascribed value of these transactions is ~$11.4bn (~12x EBITDA). Subject to the relevant approvals, the closing of the transaction is expected in late Q2/22 or Q3/22.
Capital Allocation: PPL is expected to receive ~$700mm in cash proceeds upon closing of the transaction, with ~$550mm allocated towards debt repayment and the remainder allocated towards share repurchases, which increases the company's share buyback budget to $350mm from $200mm. Upon closing of the transaction and subject to approval and declaration by its board of directors, PPL expects to increase its common share dividend by $0.0075 per month ($0.09 annually), representing a 3.6% increase.
Forecasts Updated: We have updated our financial forecasts to reflect our initial assumptions about the transaction. As a result of this, our target price increases three dollars to $48.00.
TD Investment Conclusion
The formation of Newco with KKR bolsters Pembina's presence in WCSB, in our view, and likely enhances optionality of growth prospectively. We believe PPL will be even better 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. PPL's proposed market access and carbon-storage initiatives demonstrate to us the company's ability to pivot towards a lower-carbon-energy future.
Outlook
Accretion to PPL: The transaction is expected to provide mid-to-high single digit accretion in adjusted cash flow from operating activities to PPL shareholders over the next five years. Factors driving accretion include net impact of the purchase and sale components of the transaction, synergies from operating combined assets collectively, deferral payment of cash taxes, and the expected repurchase of PPL's common shares using cash proceeds obtained from the transaction. On the conference call, management noted that decisions to proceed with expansion plans for the Prince Rupert Terminal and Phase VIII of the Peace Pipeline System Expansion are independent of its involvement with KKR in Newco.