RBC Initial CommentsFebruary 23, 2023
Pembina Pipeline Corporation
Quick Take: Volumes continue to grow, RFS IV sanctioned, and guidance reiterated
TSX: PPL | CAD 45.22 | Outperform | Price Target CAD 58.00
Sentiment: Neutral
Our take
We believe the Q4/22 results and related update confirm our positive thesis for the stock, which is predicated on growing Western Canada Sedimentary Basin (WCSB) natural gas and natural gas liquids (NGL) volumes and Pembina’s ability to benefit from higher capacity utilization at existing facilities (i.e., Q4/22 volumes up 4% year-over-year excluding Nipisi and Mitsue and divested assets) and demand for new infrastructure (e.g., newly sanctioned $460 million RFS IV project).
Details
EBITDA and DCF/share were fairly close to our forecast. In Q4/22, Pembina’s EBITDA was $925 million versus our forecast of $897 million and consensus of $908 million (13 estimates; range of $887–951 million), while AFFO/share in Q4/22 was $1.25, compared to our forecast of $1.32. Segment-wise, Pipelines EBITDA was $548 million versus our forecast of $530 million, Facilities EBITDA was $288 million compared to our estimate of $303 million, Marketing & New Ventures EBITDA was $171 million versus our forecast of $121 million, and Corporate EBITDA was ($82) compared to our estimate of ($57) million.
Proceeding with RFS IV. Pembina announced that it will begin construction of a new 55,000 b/d propane-plus (C3+) fractionator at its existing Redwater fractionation and storage terminal. Pembina estimates that the project will cost $460 million with an in[1]service date in H1/26. The company noted that its Redwater facility is underpinned by long-term take-or-pay contracts, and in recent quarters it extended existing contracts and signed incremental new contracts. Further, Pembina noted its expectation that previously announced agreements with three Northeast B.C. producers will provide “significant” volumetric support to RFS IV.
Still guiding to be free cash flow positive despite an increased capital budget. With the sanctioning of RFS IV as well as several minor new projects, Pembina increased its 2023 capex program to roughly $800 million (from $730 million). However, the company still expects cash flow from operations to exceed dividend payments and forecast capex, while noting that it anticipates utilizing incremental cash flow to reduce debt and provide flexibility to fund future projects.
Updated strategy unveiled; we look to the conference call for more details on how the higher-level statements could play out. Pembina highlighted that “following a recent period of succession and re-organization,” the board took the opportunity to review the company’s strategy. Overall, the higher-level statements do not appear to us to signal a major change in the company’s direction (e.g., “continuing to invest in and grow the core businesses that provide critical transportation and midstream services”) or its commitment to its long-standing financial guardrails. Nevertheless, we look to the conference call for management’s commentary on how certain facets of the strategy could unfold (e.g., Does “to meet global demand, we will transform and export our products” signal vertical integration?).
EBITDA guidance for 2023 reaffirmed. Pembina reiterated its 2023 EBITDA guidance range of $3.5–3.8 billion, which it rolled out in December 2022, with the company specifically noting that the reaffirmation of guidance includes a roughly $30 million negative impact from a natural gas liquids release on its Northern Pipeline system that occurred on January 18, 2023. Our forecast for 2023 EBITDA heading into the quarterly release was $3.734 billion, and we note that over the last five years, Pembina has usually exceeded the high end of its initial guidance range.