Pembina Pipeline's Profit Potential

| About: Pembina Pipeline (PBA)

I've recently become interested in dividend paying stocks and have been looking for companies that pay healthy dividends while at the same time provide great upside profit potential in terms of their forward long-term growth and capital appreciation.

One company that meet these criteria is Pembina Pipelines - PPL, PBA.

What Pembina Does

Pembina Pipelines (PBA) is a Canadian company that was incorporated in 1954 under the laws of the Province of Alberta. Originally, the company's business was operating liquids feeder pipelines for crude oil companies operating in Alberta, Canada.

Today the company is firmly established as an integrated energy infrastructure service provider.

Conventional Pipelines

Presently, Pembina owns and operates 7,850km of conventional pipelines. These pipelines move about 50% of Alberta's conventional crude oil production, about 30% of NGLs produced in western Canada and all of the conventional oil and condensate produced in British Columbia.

Oil Sands and Heavy Oil

Pembina transports synthetic crude oil from both the Syncrude and Canadian Natural Resources oil sands operations. Pembina also provides diluent and diluted bitumen pipeline transportation for both oil sands and heavy oil producers operating southwest of Fort McMurray the Peace River/Seal region of Alberta.

Pembina has approximately 1,650km of oil sands pipelines and about 30% of the total take-away capacity from the Athabasca oil sands region.


The company operates two midstream business segments, crude oil and NGL.

The crude oil segment includes a network of truck terminals at hub locations and includes storage and pipeline connectivity. (Pembina Nexus Terminal)

The NGL segment includes Redwater West and Empress East. Pembina also owns a 2/3rds interest in Three Star Trucking, which is based in Saskatchewan and hauls oil for Bakken-area producers.

Gas Services

Pembina owns and operates a growing natural gas gathering and processing business, which includes the Cutbank Complex. This complex is made up of three sweet gas processing plants and a new ethane extraction facility. The company also has approximately 350km of gas gathering pipelines.

Pembina is in the process of aggressively expanding this segment of the business.

Pembina's Growth Projects

  • Musreau 11 Shallow Cut Gas Plant will be a company constructed, owned and operated plant designed to extract propane-plus (C3+) and is expected to process 100 million cubic feet of natural gas per day. This will yield approximately 4,200 barrels per day of NGL for transport on Pembina's pipelines.

The project is expected to cost approximately $110 million and is supported by long-term contracts with area producers for 100% of the facility's capacity.

  • The Cornerstone Oil Sands Pipeline proposes two 320km pipelines and related infrastructure to service the KKD Oil Sands Partnership (KOSP). This proposed project will consist of two parallel pipelines carrying blended bitumen and diluent supply, pump stations, and terminal facilities near Conklin and Edmonton, Alberta.
  • Redwater Fractionator and Storage (RFS) Projects

On July 31st of this year, Pembina announced it had entered into long-term cost-of-service agreements with NOVA Chemicals Corporation to provide storage in Pembina's storage cavern currently under development at the Pembina's Redwater fractionation and storage site.

  • Peace and Northern Pipeline Expansion Projects

Phase 1 of both an NGL expansion of 52,000 bpd and a crude oil and condensate expansion on the Peace Pipeline System of 40,000bpd is underway. These two expansions are expected to be completed and in-service late 2013.

Phase 2 proposes to increase Pembina's NGLs and crude oil condensate throughput capacity by an additional 108,000 bpd. Plans include increasing the Peace Pipeline System capacity by 55,000 bpd by late-2014, and the Northern NGL System by 53,000 bpd by mid-2015.

  • Saturn Gas Plants

The Saturn Facility, which is currently under construction and expected to be in-service in the fourth quarter, 2013, is a 200 million cubic feet per day enhanced natural gas liquids extraction facility. Pembina expects this facility to extract up to 13,500 barrels per day of liquids. This facility will be connected to Talisman Energy's Wildriver and Bigstone gas plants.

On March 5, 2013 Pembina announced agreements with a third- party producer for a firm-service contract for 130 million cubic feet per day for a period of 10 years. (approximately 65% of the facilities total capacity).

  • Resthaven Enhanced Liquids Extraction Facility

Pembina is participating in a project to develop an enhanced liquids extraction facility ("The Resthaven Facility") in west central Alberta. The project involves modifying and expanding an existing shallow cut gas plant. The company estimates the Resthaven Facility, associated NGL Pipeline and storage will cost $230 million (net to Pembina) and contribute annual EBITDA of $30 to $40 million (including pipeline tolls). Pembina expects the new facilities to be in-service by late 2013.

The Profit Potential

  • For 1H 2013, Pembina's consolidated operating margin totaled $447.6 million compared to $276.6 million in 1H 2012. This is an increase of approximately 62%.
  • 1H 2013 earnings were $184.3 million ($0.61 per share) compared to $113 million ($0.50 per share) for the same period in 2012. These outstanding results were due to improved operating results and the impact of the acquisition of Provident Energy Limited, which was completed on April 2, 2012.
  • 1H adjusted cash flow from operating activities was $351.4 million ($1.16 per share) compared to $188.3 million ($0.83 per share) for the same period in 2012.
  • On August 9, 2013, the company announced a 3.7 percent increase of its monthly dividend rate from $0.135/share/month to $0.14/share/month. This increase reflects Management's ongoing confidence in Pembina Pipeline's solid fundamentals and continued growth prospects.

You can check more details on Pembina's financials on the company's website.

Growth Potential

During 1H 2013, Pembina secured approximately $1.5 billion in capital projects (not including the proposed Cornerstone Pipeline). The company expects these projects to provide long-term, sustainable returns once completed.

Financing Activity

July 26, 2013: Pembina closed its offering of 10,000,000 cumulative redeemable rate reset class A preferred shares, series 1, at a price of $25.00 per share.

April 30, 2013: Pembina closed its offering of $200 million of 30-year senior unsecured medium-term notes, with a fixed interest rate of 4.75% per annum, paid semi-annually, and maturing on April 30, 2043.

Proceeds from these two financings will be used to partially fund capital projects, repay amounts outstanding on the company's credit facility, and for other general corporate purposes.

Summary and Conclusion

Pembina's Chief Executive Officer, Bob Michaleski, said this about Pembina's 1H performance: "With solid performance in the first half of the year, our strengthened balance sheet, and the 3.7 percent increase in our monthly dividend, Pembina is on track to continue delivering consistent and improving financial results and long-term returns to investors."

The Company's President and Chief Operating Officer, Mike Dilger, added: "Pembina has a strong track record of identifying and completing projects that enhance our financial and operating results and drive sustainable growing shareholder value, as evidenced by the dividend increase we announced today (August 9, 2013)."

(Click here for full 1H financials)

In conclusion, if you are like me and looking for a great, well-managed company with a strong and long track record of outstanding performance, that pays a healthy dividend and has tremendous growth potential, you should take a close look at Pembina Pipelines.

Disclosure: I have no positions in any stocks mentioned, but may initiate a long position in PBA over the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.