RBC Capital Markets Expects Positive Final Investment Decision For Pembina Pipeline's Cedar LNG Project
09:29 AM EDT, 04/05/2024 (MT Newswires) -- RBC Capital Markets said Friday that it expects a "positive final investment decision" for Pembina Pipeline Corp.'s (PPL.TO) Cedar liquefied natural gas project "assuming there is no deterioration in the project finance market."
RBC made the assessment after Pembina outlined the progress on a number of key items for the project, including finalizing the long-term liquefaction tolling agreement with ARC Resources Ltd. (ARX.TO) and issuing a notice to proceed with its contractors Samsung Heavy Industries and Black & Veatch for the floating LNG production unit.
On the capital cost, RBC noted that roughly 70% of the capex is covered by a fixed-price, lump sum contract with Samsung
Heavy Industries and Black & Veatch (i.e., well-known contractors) for work that will occur under controlled conditions in a
shipyard (i.e., not subject to B.C. weather). Further, it said, Pembina has a "track record of superior project execution", including its recent announcement in February 2024 that its Phase VIII pipeline project is trending even further under budget. "This is particularly impressive given many high-profile energy infrastructure projects in Western Canada have come in significantly over budget."
Return wise, RBC thinks the market will be okay with Cedar LNG's take-or-pay contracts securing an adequate return, with volume and marketing upside potentially resulting in more attractive project returns. Further, the bank would not be surprised if there is additional upside from fee-based volumes associated with complementary infrastructure.
RBC added: "The aspect that may draw a measure of caution is Pembina's decision to underpin the roughly other half of Cedar LNG's capacity that is not covered by the long-term take-or-pay with ARC Resources, and we believe that investors may take a "wait and see" approach to Pembina's ability to assign its contracted capacity to a third-party. Based on our discussions with the company, we believe there is confidence in the ability to assign the contracts somewhat shortly following a final investment decision based on the nature of existing and ongoing discussions with interested counterparties."
RBC has on Pembina an outperform rating with a C$58.00 price target.
Meanwhile, National Bank of Canada said with all material regulatory approvals in hand, it views the project's 8.7x build multiple as being fair relative to the remaining construction/commercial risk profile and overall strategic benefits to the company. The bank has on Pembina a sector perform rating with a $50.00 price target.