Company Reports

The significant progress Pembina has made on Cedar LNG will make a final investment decision by mid-2024 very likely, and it will add an important growth avenue to the firm in the latter half of the decade. The 20-year take-or-pay agreement for about half of the capacity now, and another similar contract expected later, supports attaching a wide moat to this particular asset. We would expect a mid-2024 investment decision to translate to an in-service date in late 2028. With all material permits obtained and the shared 50/50 ownership with the Haisla Nation, we would not expect any regulatory or stakeholder pushback, as the focus will be on obtaining the needed capital for the investment and signing the final contract for the remaining capacity.

Pembina offers a fully integrated "store" to its customers, allowing it to retain full economics over the midstream value chain. Its major earlier growth opportunities across liquefied natural gas (a CAD 4 billion-CAD 5 billion net investment in Jordan Cove LNG and the related Ruby pipeline repositioning) and petrochemicals (a CAD 4.5 billion venture with Canada Kuwait Petrochemical) were essentially canceled in early 2021, leading to significant write-offs.

Pembina’s fourth-quarter and full-year 2023 results met our expectations, as 2023 EBITDA of CAD 3.8 billion matched our forecast. 2024 guidance of a midpoint of CAD 3.875 billion, excluding the pending Alliance/Aux Sable deal that has yet to close, looks realistic. The forecast is consistent with ours, after excluding Alliance/Aux Sable, which we assume will close in 2024. We continue to think the transaction is one of the better ones Pembina has made on the M&A front in several years. It should acquire high-quality assets for a reasonable price with likely attractive expansion opportunities, which we expect to start to be spelled out by management once the deal closes. Initially, we expect to maintain our CAD 41 fair value estimate and no-moat rating.

Pembina offers a fully integrated "store" to its customers, allowing it to retain full economics over the midstream value chain. Its major earlier growth opportunities across liquefied natural gas (a CAD 4 billion-CAD 5 billion net investment in Jordan Cove LNG and the related Ruby pipeline repositioning) and petrochemicals (a CAD 4.5 billion venture with Canada Kuwait Petrochemical) were essentially canceled in early 2021, leading to significant write-offs.

Pembina offers a fully integrated "store" to its customers, allowing it to retain full economics over the midstream value chain. Its major earlier growth opportunities across liquefied natural gas (a CAD 4 billion-CAD 5 billion net investment in Jordan Cove LNG and the related Ruby pipeline repositioning) and petrochemicals (a CAD 4.5 billion venture with Canada Kuwait Petrochemical) were essentially canceled in early 2021, leading to significant write-offs.

We think Pembina's acquisition of Enbridge's interests in the Alliance, Aux Sable, and NRGreen assets for about CAD 3.1 billion is a material strategic win for both parties. We consider the valuation paid at about 9 times 2024 EBITDA or 8 times including expected synergies to be reasonable. This breaks down into about 11 times 2024 EBITDA for the Alliance pipeline, and 7 times for the Aux Sable assets. As a result, we do not expect to change our CAD 41 or USD 29 fair value estimates for Pembina, or our CAD 52 and USD 38 fair value estimates for Enbridge. Our narrow moat rating for Enbridge and our no moat rating for Pembina are also unchanged.

Pembina's 2024 guidance announcement matches our forecast, so we do not expect to change our CAD 41 or USD 29 fair value estimate or no moat rating. 2024 EBITDA is expected to be a midpoint of CAD 3.875 billion, matching our forecast. The guidance reflects modest volume growth across existing assets, lower marketing contributions due to weaker natural gas liquids pricing, and a fairly minimal increase over our 2023 EBITDA expectations of about CAD 3.8 billion. Export opportunities remain front and center for Pembina with the expected startup of the Trans Mountain Pipeline Expansion, plus the eventual addition of liquefied natural gas volumes from LNG Canada. Petrochemical additions are also material, with the expected construction of a new ethane plant from Dow, so these are all opportunities for Pembina to provide connections to the needed volumes.

Pembina’s third-quarter results were a bit better than expected, primarily due to stronger marketing contributions. Pembina’s 2023 EBITDA guidance is now a midpoint of CAD 3.8 billion, compared with prior guidance of CAD 3.65 billion. We had expected some marketing upside, as our forecast was CAD 3.7 billion, but we’ve increased our near-term forecast again. Third-quarter marketing EBITDA still fell about 12% from last year’s levels, but results are not as bad as originally feared, due to higher margins on natural gas liquids sales. After updating our model, our CAD 41 per share fair value estimate is unchanged, while our U.S. fair value estimate falls $1 per share to $29 due to updated exchange rates. Our no-moat rating remains unchanged.

Pembina offers a fully integrated “store” to its customers, allowing them to retain full economics over the midstream value chain. Its major earlier growth opportunities across LNG (a CAD 4 billion-CAD 5 billion net investment in Jordan Cove LNG and the related Ruby Pipeline repositioning) and petrochemicals (a CAD 4.5 billion venture with Canada Kuwait Petrochemical) were essentially canceled in early 2021, leading to significant write-offs.

Pembina offers a fully integrated “store” to its customers, allowing them to retain full economics over the midstream value chain. Its major earlier growth opportunities across LNG (a CAD 4 billion-CAD 5 billion net investment in Jordan Cove LNG and the related Ruby Pipeline repositioning) and petrochemicals (a CAD 4.5 billion venture with Canada Kuwait Petrochemical) were essentially canceled in early 2021, leading to significant write-offs.

Pembina's second-quarter earnings were weak, as the ongoing Canadian wildfires and reduced operating pressure on the Northern pipeline system until mid-May hurt results. Pembina narrowed its 2023 EBITDA outlook to a range of $200 million from $300 million, effectively removing some earnings upside, while maintaining a midpoint of CAD 3.65 billion. We will maintain our 2023 EBITDA CAD 3.7 billion forecast, our CAD 41 per share fair value estimate, and no moat rating. Our USD fair value estimate moves up slightly to USD 31 per share due to refreshed exchange rates.

Pembina offers a fully integrated “store” to its customers, allowing them to retain full economics over the midstream value chain. Its major earlier growth opportunities across LNG (a CAD 4 billion-CAD 5 billion net investment in Jordan Cove LNG and the related Ruby Pipeline repositioning) and petrochemicals (a CAD 4.5 billion venture with Canada Kuwait Petrochemical) were essentially canceled in early 2021, leading to significant write-offs.

The Trans Mountain pipeline expansion, once seen as a savior for Canadian oil by offering a key export channel for Canadian producers to reach Asian markets, is now looking like it will be remembered very differently and negatively by investors and the Canadian government. A loss between CAD 15 billion and CAD 20 billion (based on a CAD 10 billion-CAD 15 billion valuation) is likely, with the potential for a higher loss still if the pipeline sees further cost increases. We continue to see Enbridge’s Mainline system as the best alternative for the Trans Mountain expansion, as struggles by the Trans Mountain expansion mean more barrels remaining on the Mainline. As it stands, a vicious cycle of higher costs and higher tariffs for the Trans Mountain expansion serves as further fuel for shippers to commit to the Mainline (a major reason behind our narrow moat for Enbridge) and related U.S. expansions as it would likely be cheaper to ship Canadian barrels down to the Gulf Coast for export as it stands now, completely undermining the original purpose of the Trans Mountain expansion.

Canadian wildfires in the Western Canadian Sedimentary Basin have shut in likely in excess of 300,000 barrels per day of production, per Rystad Energy, primarily across the Montney and Duvernay plays. The number of wildfires are about 17% above 10-year averages year to date with 944 fires, but the area burned is nearly 10 times 10-year averages year to date with nearly 500,000 hectares, according to the Canadian Interagency Forest Fire Center. The impact on our Canadian midstream firms (Enbridge, Keyera, Pembina, and TC Energy) is likely to be notable for second-quarter earnings but not material enough to result in fair value estimate or moat changes at this time.

Pembina's first-quarter earnings were somewhat challenging with the negative impacts of the Northern Pipeline outage and weak marketing spreads. Overall EBITDA fell 6% to CAD 947 million from last year's levels. Despite the negative impacts of the North Pipeline outage (CAD 54 million) and marketing (a CAD 98 million decline from last year), Pembina reaffirmed its 2023 EBITDA midpoint of CAD 3.65 billion. Given this matches up well with our CAD 3.68 billion forecast, we expect to leave our CAD 41 and $30 fair value estimates and no moat rating unchanged.

In a major step forward, Pembina announced that its Cedar LNG project has received an environmental assessment certificate from the B.C. Environmental Assessment Office and signed an agreement with ARC Resources for about half of the project’s 3 million metric tons per year of capacity.

The Trans Mountain Pipeline expansion, or TMX, project is now expected to cost CAD 30.9 billion, a more-than 40% increase from its estimate last year of CAD 21.4 billion and almost 3 times its original estimate of CAD 12.6 billion. The cost increases were attributed to inflation and supply chain challenges, floods, terrain issues, and higher water disposal costs, among other items. It is now almost certain that the Canadian government will lose billions of dollars on a sale, as we can’t see a pathway for any sale price to approach this current cost estimate. There are no fair value estimate or moat implications for our Canadian midstream coverage.

After taking a deeper look at Pembina's fourth-quarter results, we are boosting our fair value estimate to CAD 41 and USD 30 from CAD 37 and USD 27. The change is mainly due to higher near-term cash flows, including higher tariffs in 2023 to incorporate higher inflation-linked pricing. Our model also includes the pending sale of the 50% interest in KAPS for CAD 662.5 million and the Ruby pipeline payment as part of its bankruptcy for CAD 102 million.

Pembina offers a fully integrated “store” to its customers, allowing them to retain full economics over the midstream value chain. Pembina lacks a compelling growth opportunity at the moment and could be back on the M&A trail in 2023 to address its needs, including a potential bid for Trans Mountain. its major growth opportunities across LNG (a CAD 4 billion-CAD 5 billion net investment in Jordan Cove LNG and the related Ruby Pipeline repositioning) and petrochemicals (a CAD 4.5 billion venture with Canada Kuwait Petrochemical) were essentially canceled in early 2021, leading to significant write-offs.

Pembina’s fourth-quarter results and its 2023 guidance met our expectations. Full-year EBITDA came in at CAD 3.7 billion, matching our CAD 3.7 billion forecast. In comparison, our 2023 EBITDA forecast of CAD 3.6 billion sits within Pembina’s guided range of CAD 3.5 billion to CAD 3.8 billion. At first glance, we will keep our CAD 37/USD 27 fair value estimates and our no-moat rating intact.