THE TD COWEN INSIGHT
We are initiating coverage on Pembina Pipeline Corp (PPL-T) with a BUY rating and $66.00 target. Pembina is our top pick, with our view that it is fundamentally mispriced after ranking second overall in our concurrently published scorecard. Pembina features the best capital structure, with the strongest track record, a competitive asset portfolio, and a robust growth opportunity pipeline.
Pembina's Investment Attributes are 'Just Right': Pembina ranked second overall in our concurrently published Canadian midstream scorecard. Key takeaways as follows:
The Best Capital Structure in Canadian Midstream: In our view, Pembina strikes the right balance on capital structure, featuring a below average leverage ratio, high contracted/ fee-based cash flow profile, meaningful exposure to investment grade counterparties, ability to fund capital spending and dividends with internally sourced cash flows and strict adherence to its financial guardrails.
Strong Historical Track Record: Pembina features a strong historical track record, with a consistent pattern of upward consensus estimate revisions over time and share price performance that features below average volatility with a higher ratio of relative outperformance to underperformance.
Highly Integrated Assets: Pembina's assets in Canada span across all commodity verticals and most midstream capabilities, with comparable or better asset integration than even its largest peers.
Strong Growth Metrics: Pembina is leveraging its diverse platform to make outsized investments in natural gas infrastructure and stands out on our debt-adjusted EBITDA/ share growth metric, despite a high spending profile and no associated growth related to Cedar LNG.
Pembina's Valuation is 'Too Cold': Pembina has underperformed its Canadian midstream peers by ~17% since it reported Q3/24 results as a consequence of lower go-forward profitability from its Cochin pipeline and lower than expected 2025 EBITDA guidance. Even with these factors contemplated in our forecast, Pembina currently trades at a 2025E EV/ EBITDA multiple of 10.8x, below its historical 10-year mean of 11.6x and the peer group average of 11.2x. In our view, this recent underperformance provides investors with a meaningful buying opportunity.
Nobody Eating Pembina's Porridge: We believe that Pembina's Peace/NEBC pipeline systems have several meaningful competitive advantages that are discussed in detail herein. The near- and medium-term macro also remains constructive for WCSB natural gas liquids (NGL) growth, which should benefit all competitors in this market vertical.