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Renaissance Technologies' Long-Term Pick

May 02, 2014 | About:

Recent news concerning Keystone XL and the White House decision to postpone approval, offer strong prospects for other industry competitors. Since the decision is not expected to occur any time before November 2015, and construction may take anywhere up to two years, TransCanada (TRP) is giving some unwanted profitable opportunities to peers. Canadian and American crude oil and natural gas liquids transporters can find themselves in a positive market condition, where a recovering economy places pressure upon energy deliveries. Hence, current assets for the transport of energy continue to experience a higher demand for the services offered. In that context, Pembina Pipeline (PBA) looks to sustain the growth trend started early on 2010, when the company entered the stock market.

Performance Matches Expectations

Pembina Pipeline has clearly stated its business strategy: provide highly competitive and reliable returns to investors through monthly dividends on our common shares while also enhancing the long-term value of our securities. The way to go about doing just that is with cost-effective and reliable services, supported by a safe and environmentally responsible diverse asset portfolio, guided by a prudent financial management of all business decisions. So far, the strategy has been applied successfully as displayed by the performance displayed in the stock market.

The good momentum enjoyed by Pembina Pipeline is reflected on the reports issued by financial institutions. Throughout 2013 positive reviews abounded, especially during the second half of the year. Four institutions issued ratings on the stock during 2014, with only Canaccord Genuity downgrading the stock to “Hold.” All other three, including Zacks, have given the stock an “Outperform” rating. Most important, face value has reached the price target forwarded by the institutions.

Such performance is backed by the results reported for 2013. Operating margins totaled $949 million compared to $676 million during the prior year, representing an increase of approximately 40 percent. Part of the impact relates to important improvements in the midstream and gas services segments, compounded by the acquisition of Provident Energy. Growth has reflected upon earnings which increased to $351 million, or $1.12 per common share for the full-year of 2013 compared to $225 million, or $0.87 per common share. Last, management announced the construction of a new 45,000 square foot office in Sherwood Park, Alberta, to facilitate the company's continued growth plans.

Expansion-Based Growth

Growth for Pembina Pipeline in the future is tied to several undergoing projects. First, the company announced the long-term agreements with 30 customers to proceed with a $2 billion investment to begin the Phase III Expansion. Second, it plans to construct, own and operate a new shallow cut gas plant, Musreau II, at an approximate cost of $110 million. Third, an Engineering Support Agreement for diluent and blended bitumen transportation services has been reached with KKD Oil Sands Partnership. Fourth, the Resthaven Facility is expected to be in-service in the third quarter of 2014.

An important competitive advantage held by Pembina Pipeline is the integrated approach to assets. The strategy should help it win additional transportation business to support the terminal side of the business. Hence, the projects mentioned above are of key importance. For that reason, the production of heavy oil and oil sands assets resulting in steady cash flows with little sensitivity to volumes or commodity prices is all the more relevant for the model. Such business structure has resulted in a narrow economic moat mostly supported on the gas services segment.

Currently trading at 37.7 times its trailing earnings, Pembina Pipeline carries an 8% discount to the industry average. At the same time, the stock pays $0.14 in quarterly dividends, for a total annual yield of 4%. The important growth prospects and discount have attracted the attention of Renaissance Technologies, pushing the fund to acquire stock throughout 2013 and turning into the largest shareholder. And against Peter Lynch’s advice, from here it is recommended to acquire the stock for a long-term investment.

Disclosure: Vanina Egea holds no position in any of the mentioned stocks.

About the author:

Vanina Egea
A fundamental analyst at Lone Tree Analytics

Visit Vanina Egea's Website


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