Post by
hawk35 on Nov 08, 2021 7:28pm
Complete comments from RBC today
November 8, 2021
Pembina Pipeline Corporation
Waiting for drilling, while benefitting from frac
spreads in the meantime
Our view: Pembina is well-positioned to directly benefit from strong
commodity prices (e.g., frac spreads), while waiting for producers to ramp
up drilling programs, which could drive stronger volumes through its
integrated midstream footprint and ultimately underpin new long-term
contracted infrastructure. Overall, we really like Pembina's assets and their
leverage to WCSB gas/liquids production, although we are mindful of M&A,
and with that the potential for a sizable equity issuance, which may be
lurking in 2022 (e.g., former Inter Pipeline assets - please click here).
Key points:
2021 guidance reiterated. Pembina reiterated its 2021 EBITDA guidance of
$3.3–3.4 billion (we were at $3.392 billion heading into the quarter and our
estimate remains unchanged), noting that it remains “on track” to deliver
full-year EBITDA within the range. With $2.463 billion in EBITDA reported
in 2021 year-to-date, this implies a range of $837-937 million in EBITDA for
Q4/21 (our estimate is $929 million; please see a summary of our financial
forecast in Exhibit 4).
2022 is shaping up to be a good year. The company will provide guidance
and a capital budget update for 2022 in early December. We think 2022
could be a bumper year for Marketing contribution given the strong
commodity price environment and removing the drag associated with
Pembina's unfavourably priced hedges for 2021 (i.e., $166 million of
realized losses year-to-date).
Positive updates for Alliance. A recent open season for short-term capacity
was nearly three times oversubscribed, and Alliance is essentially fully
contracted for 2022. The company believes that the current outlook
supports contracting of capacity beyond 2022, and stated that further
updates could be provided by the end of the year.
Q3/21 results were close to our forecast. In Q3/21, EBITDA was $850
million versus our forecast of $816 million and consensus of $837 million
(company’s sell-side analyst survey). AFFO/share was $1.43 versus our
estimate of $1.49 and the variance appears to be largely due to greaterthan-
expected cash taxes related to the transaction termination fee
received from Inter Pipeline.
Moderating our 2021 and 2022 estimates. Our new 2021 and 2022 AFFO/
share estimates are $4.69 and $4.62, respectively (down from $4.78 and
$4.67, respectively) to primarily reflect a lower expected contribution from
the Pipelines business after moderating our forecast for the segment,
particularly based on operating cost trends observed during the quarter
and year-to-date that have been tracking above our forecast.
Rolling out our 2023 estimates. Our forecast for 2023 includes AFFO/
share of $4.85 and EBITDA of $3.695 billion. We expect growth from 2022
to be driven by assets placed into service, partially offset by somewhat
lower Marketing results year-over-year based on a more conservative
assumption for commodity spreads.
Guidance for 2021 reaffirmed; we note a strong setup for Marketing into 2022
Pembina reiterated its 2021 EBITDA guidance of $3.3–3.4 billion (we were at $3.392 billion
heading into the quarter and our estimate remains unchanged), noting that it remains “on
track” to deliver full-year EBITDA within the range. With $2.463 billion in EBITDA reported in
2021 year-to-date, this implies a range of $837-937 million in EBITDA for Q4/21 (our estimate
is $929 million; please see a summary of our financial forecast in Exhibit 4).
While we think some investors may have been disappointed by a reiteration of guidance
(rather than an increase), we also think that Pembina has been relatively consistent in
messaging the headwinds it has seen to its business as it has progressed through the year, and
we continue to expect that the company will be close to the top-end of its guidance range.
The company will provide guidance and a capital budget update for 2022 in early December.
With a relatively attractive outlook, including strong commodity pricing and a more favourable
hedge book, we think 2022 could be a bumper year for Marketing contribution (we expect
nearly $100 million in incremental Marketing EBITDA year-over-year, at $507 million in 2022
compared to our estimate of $412 million in 2021). Pembina’s commodity hedging program
has weighed on 2021 results as prices have moved higher (the company has reported $166
million of realized losses on commodity-related derivatives through 2021 to-date), but this
should be less of an issue for 2022 results as older, lower-priced hedges roll off. Management
noted on its conference call that it has currently hedged roughly 38% of its frac spread
exposure for 2022 (excluding Aux Sable); however, we expect that these hedges are, on
average, at significantly higher prices than the 2021 hedge positions.
Outside of Marketing results, we also expect the strong commodity price environment to be a
tailwind for volumes across Pembina’s integrated system, creating a setup for strong operating
leverage as volumes increase. Further, we think improved commodity prices and sentiment
should be supportive as Pembina continues discussions with its customers ahead of a
reactivation decision on Phase VIII that it expects to make in Q4/21
. Other updates with the quarter
· Positive updates for Alliance. Pembina noted that it is seeing a more favourable
environment for the Alliance Pipeline, with a wider AECO-Chicago differential, ongoing
switching from coal-fired to gas-fired power generation in the U.S., and LNG exports
pulling volumes south to the U.S. Gulf Coast. A recent open season for short-term capacity
was nearly three times oversubscribed, and Alliance is essentially fully contracted for
2022. The company believes that the current outlook supports contracting of capacity
beyond 2022, and stated that further updates could be provided by the end of the year.
· Committed to reducing greenhouse gas intensity. Pembina announced in October that it
has committed to reducing the company’s greenhouse gas (GHG) emissions intensity by
30% by 2030, relative to a baseline of its 2019 emissions. To meet this target, the company
stated that it will focus initially on operational opportunities, greater use of renewable
and lower emission energy sources, and investments in a lower carbon economy.
o Operational opportunities: Pembina highlighted optimizing pipeline capacity and
operations, constructing cogeneration capacity at certain facilities, modernizing and
optimizing compression facilities, enhancing leak detection and repair programs, and
reducing flaring and venting.
o Renewable energy and investing in a lower carbon economy: Pembina highlighted
increasing its use of renewable energy (e.g., the company’s power purchase
agreement for the Garden Plain Wind Power Project, and other potential similar
agreements across its business), developing the Alberta Carbon Grid, and evaluating
pilot projects for carbon capture and storage at the company’s gas processing and
fractionation facilities.
Q3/21 results were relatively in line with our forecast and consensus
In Q3/21, EBITDA was $850 million versus our forecast of $816 million and consensus of $837
million (company’s sell-side analyst survey). AFFO/share was $1.43 versus our estimate of
$1.49 and the variance appears to be largely due to greater-than-expected cash taxes related
to the transaction termination fee received from Inter Pipeline.
Valuation
Our $48.00/share price target is based on an EV/EBITDA
multiple of 11.5x and includes no upside from the mothballed
growth initiatives. For much of the last 15 years, Pembina’s
shares have traded within a range of roughly 10–13x EBITDA.
We believe a valuation at the mid-point of the range
is appropriate given the improving market fundamentals,
particularly in Western Canada. We believe that the relative
risk-adjusted expected total return to our price target
supports our Outperform rating on the shares.
Upside scenario
Our $55.00 per share upside scenario is based on a 1x
premium to our base valuation (resulting in EV/EBITDA being
at the upper-end of the 15-year range) plus roughly $1.00/
share for deferred projects that have been mothballed in the
current environment but could move forward in the future.
The EV/EBITDA valuation is modestly higher than the group
average, reflecting the high proportion of cash flow derived
from the NGL pipeline and terminal infrastructure, primarily
under take-or-pay contracts.
Downside scenario
Our downside scenario of $31.00 is based on the pre-COVID
trough valuation for the stock (i.e., 9x EBITDA) applied to our
forward EBITDA.
Investment summary
We expect Pembina’s shares to outperform its peers for the
following key reasons:
• Growing WCSB volumes should drive higher EBITDA.
Whether it be uncontracted capacity or within its contract
structures that blend minimum take-or-pay levels with feefor-
service upside as volumes grow, we expect Pembina
to benefit from growing gas and liquids volumes in the
Western Canada Sedimentary Basin (WCSB), particularly
with its assets levered to the Montney, Duvernay and Deep
Basin.
• We expect growing volumes to also drive new projects
underpinned by take-or-pay contracts. We expect growing
volumes to result in contracted infrastructure opportunities,
evidenced by the re-activation of the Phase IX expansion,
some of which could be announced by the end of 2021.
New projects could include previously mothballed initiatives
including the Phase VIII pipeline expansion or the Prince
Rupert Terminal expansion.
• Solid base of business with a commodity kicker. Although
the hedge book was prudent risk management for 2021, it
has resulted in a substantial reduction from margins based
on spot commodity prices. However, hedge disclosures as
part of the Q3/21 results lead us to believe that hedging
losses booked in 2021 should largely reverse in 2022
assuming constant commodity prices/spreads.
• Potential catalysts. Improved investor sentiment towards
energy and midstream stocks; additional volumes for the
conventional pipeline system; government programs that
strengthen oil and gas producing customers; increased
Montney producer activity on the back of the sanctioning of
the third-party LNG Canada project.
Risks to rating and price target
Risks to our price target and rating include: (1) the impact of
COVID-19 and a weak market for energy including lower-thanexpected
throughput on the pipeline systems, (2) regulatory
intervention, (3) the ability to complete new projects on time
and on budget, (4) operational issues, (5) reduced margins in
the midstream and marketing segment, and (6) acquisitions,
investments and/or projects that fail to gain the confidence of
investors.