Pembina: Canada's Petroleum Reserves Run Deeper Than The Tar Sands

| About: Pembina Pipeline (PBA)


As a Canadian company, PBA has experienced unwarranted selling due to Tar Sands pessimism.

With core business entirely in long term contracts, short-term price turbulence has little effect on cash flow.

3 month price target: $40.00 – $42.50 (16% – 24% upside).

The Fear

Pembina Pipeline Corp. (NYSE:PBA) is a Canadian company based in Calgary, Alberta. Although the company is well situated in the natural gas and conventional crude market with a diversified 8,200 km pipeline network, the stock experienced a selloff beginning in early September 2014. With all oil stocks in a downtrend, what sets PBA apart in that swarm? The company has been bundled together with tar sands producers and their absurdly high cost of production. The cost of conjuring black gold from the tar sands has put those reserves at a disadvantage. Trucking, processing and steaming the oil from the deposits pushes the break-even price for Alberta's tar sands extractions to nearly $85 a barrel, according to the Canadian Energy Resource Institute.

The Opportunity

Western Canada has conventional plays that contribute more than a third of the region's oil production. In 2013, 3.2 million barrels per day of oil were produced in western Canada, with 1.9 Mb/d being extracted from the sand deposits, and 1.3 Mb/d originating from liquid wells. Canada is also the world's fifth largest producer of natural gas - remember the tar sands produce none of the 14.1 billion cubic feet per day of natural gas extracted in Canada (figures courtesy of Canadian Association of Petroleum Producers).

Each individual oil or gas well site eventually requires a lateral pipeline to bring its product to the trunk line and away to market. This is where Pembina's 8,200 km of pipelines shine - shuttling oil directly from the producing wells to ports and refineries in western Canada.

I feel these conventional deposits are largely ignored by traders. While this liquid and gas production alone doesn't seat Canada at the same table with Saudi Arabia, they are a valuable resource nonetheless and are a relatively inexpensive and stable source of revenue for the Canadian oil industry. Pembina provides a crucial component of infrastructure to these liquid and gas resource plays, and takes little if any damage from a slowdown in the tar sands driven by low prices.

With the crash of oil prices, investors have sold off shares of PBA. Where low oil prices are snuffing out grand plans for the tar sands, relatively inexpensive projects that tap conventional reserves will become the cash cow for Canadian oil producers. Producers need wells. Wells need pipelines. Pembina has pipelines in the ground and operating. Even without a stabilizing of crude price, I am expecting a significant rebound in the price of PBA stock. My 3-month price target is $40, the 50% Fibonacci retracement, and my upper price target of $42.5 coincides with the 61.8% Fibonacci retracement. These price targets represent a 16%-24% upside potential for PBA.

Disclosure: The author has no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it. The author has no business relationship with any company whose stock is mentioned in this article.

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