Pembina Pipelines (TSX:PPL, Financial) (PBA, Financial) is a Canada-based midstream company that operates pipelines and facilities for moving and storing hydrocarbons. The company operates over 18,000 kilometers of conventional, transmission and oil sands and heavy oil pipelines and owns gas gathering and processing facilities. Additionally, it has natural gas liquids fractionation facilities as well as storage and loading and off-loading service operations.
The business is diversified across natural gas liquids, natural gas, crude and condensate. The underlying business remains supported by significant long-term fee-based contracts, including cost-of-service or take-or-pay contracts with no volume or price risk. Approximately 75% of the company's credit exposure is with investment-grade counterparties. Pembina's debt is rated BBB. It has ample liquidity with $2.8 billion of available cash and borrowing capacity.
The following chart shows Pembina's geographical footprint.
The 15-year chart shows that Pembina's stock has taken a considerable hit over the last several months. It is now below the 9.4% growth long-term trendline. Operating cash flow per share, which also grew at a similar rate (10.4%), does not show a similar drawdown. This means the stock could bounce back strongly as markets normalize.
The company has grown rapidly over the past 15 years. The growth of the balance sheet (debt and equity) has been around 30% a year. Operating cash flow has also grown at a similar pace. Growth has been achieved by a mix of internal projects as well as acquisitions.
Valuation
Pembina is significantly undervalued when considering the median price-to-operating cash flow ratio. Based on the chart below, the share price should be around 61.74 Canadian dollars ($46.55) (versus the current price of CA$35). The margin of safety is around 43%.
Using the GuruFocus DCF calculator, I estimate a margin of safety of about 20%. The assumptions include a cost of capital (discount rate) of 8% and a company life of 30 years. The reader should note that small changes in assumptions can result in large changes in value.
Dividend
Pembina has implemented continuous dividend increases since 2011. The current yield is 7.1% and it has grown the dividend by 6.8% over the last five years. Given the pace of cash flow growth, the company should have no problem growing the dividend for many more years to come.
Conclusion
Pembina is not only significantly undervalued, but is also a strong dividend growth stock. It is a great combination of value, growth and income. The company has low direct exposure to hydrocarbon price risk as it operates mostly on a fee (take-or-pay and fee-for-service basis). However, a secular decline in hydrocarbon demand will certainly impair its value. Frankly, I don't see that happening in my lifetime. It is currently very difficult to build new pipelines in Canada due to steep regulatory, environmental and political hurdles. This gives its existing pipelines a wide moat as long as there is oil and gas to be extracted and sold from Western Canada.
Disclosure: The author is long Pembina.
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