Pembina Pipeline Corp.’s (
) new joint venture with U.S. private equity firm
KKR & Co. Inc. (
) values its assets at a premium and “enhances” exposure to key western Canadian gas supplies, according to iA Capital Markets analyst Matthew Weekes.
On Tuesday, its shares rose almost 2.3 per cent following the announcement of the new venture, which will be owned 60 per cent by Pembina and 40 per cent by KKR’s global infrastructure funds. It also incorporate some assets from Energy Transfer Canada.
“The Newco JV increases the Company’s interest in the Veresen Midstream assets and provides new interest in ETC’s assets in exchange for a portion of PPL’s assets, diversifying PPL’s gathering and processing infrastructure and expanding its exposure to NEBC,” said Mr. Weekes. “By pooling complementary assets into the JV, Newco aims to achieve enhanced scale, efficiency, and utilization of assets, improving netbacks for producers and driving increased volumes through facilities. In the short term, Newco will be focused on the integration and optimization of existing assets, but PPL acknowledged on yesterday’s conference call that there could be opportunities for the JV to pursue greenfield or M&A growth down the road. The Newco assets will be underpinned by 65-per-cent utilization of existing physical capacity, with contract duration averaging 14 years, a cost structure that is largely pass-through, and 80-per-cent investment grade or secured entity counterparty exposure. Finally, the assets include $4.6-billion of tax pools. PPL expects tax efficiencies to contribute to AOCF accretion, with Newco able to defer cash taxes for several years as it will be able to depreciate tax pools against an expanded asset base.”
Viewing the deal “positively,” Mr. Weekes said it allows Pembina, which will oversee operations, to proportionately earn $45-million in additional EBITDA on a run-rate basis while “holding leverage metrics consistent by our estimate, accounting for the planned sale of Newco’s non-operated interest in KAPS.”
“Transaction expected to provide $700-million of cash proceeds to PPL, mid- to high-single-digit cash flow/share accretion over five years, and lead to a dividend increase,” he said. “PPL intends to put $550-million toward debt repayment and $150-million toward additional share repurchases following closing (est. Q3/22 subject to competition review), as well as increase its monthly dividend by 3.6 per cent. PPL anticipates mid- to high single-digit accretion to its cash flow/share over the next five years, part of which should be recognized immediately while some will take longer to play out.”
Maintaining a “hold” rating, Mr. Weekes raised his target for Pembina shares to $46 from $44. The average on the Street is $46.09.
“In summary, the JV merges complementary assets into a well-capitalized entity that can leverage scale and efficiency to save costs for producers and generate incremental volumes, with potential for new growth opportunities down the road. The increased ownership in Veresen Midstream increases PPL’s exposure to NEBC Montney growth,” he said.
Elsewhere, a pair of analysts upgraded Pembina shares:
* CIBC World Markets analyst Robert Catellier moved it to “outperformer” from “neutral” and increased his target to $48 from $45.
* BMO’s Ben Pham raised it to “outperform” from “market perform” with a $50 target, up from $43.
Meanwhile, those making target changes include:
* Canaccord Genuity’s John Bereznicki to $49 from $47 with a “buy” rating.
“We believe this transaction has financial and strategic merit for Pembina,” said Mr. Bereznicki.
* Scotia’s Robert Hope to $49 from $47 with a “sector outperform” rating.
“The transaction increases the reach of its G&P footprint, which longer term could increase volumes directed to its downstream NGL / condensate infrastructure,” he said. “We see the transaction as quite accretive to cash flow, and we increase our estimates.”
“We recently upgraded Pembina to Sector Outperform given (1) upside to our growth estimates as Pembina is well positioned to benefit from the strong commodity price environment, including restarting deferred projects; (2) its very strong balance sheet and funding outlook, which includes share buybacks; and (3) attractive absolute and relative valuation.”
* National Bank Financial’s Patrick Kenny to $45 from $44 with a “sector perform” rating.
* Raymond James’ Michael Shaw to $45.50 from $44.50 with a “market perform” rating.
PEMBINA PIPELINE CORP
44.08+11.19 (34.02%)