Pembina Pipeline Corp. (PBA) shares have been crushed with the recent oil price collapse and are currently trading at ~2x P/S, close to all-time lows. This has made it a candidate for GuruFocus’ Historical Low P/S Screener.
Temporarily disregarding the possible future impacts of lower commodity prices, the shares look relatively undervalued compared to past financial results. PBA has shown a long-term, consistent ability to drive higher revenues and EBIT levels per share.
Disconcerting, however, is the company’s lack of positive FCF generation. While it is a capital-intensive business, they’ve been propping up their business in recent years with a combination of dilutive share issuances and debt financing.
Even more concerning is their seeming lack of attractive investment opportunities. ROA has consistently been lackluster, with current ROA levels a paltry 3.6%. To create higher ROE levels, management has turned to leverage to boost these returns to be somewhat attractive. Already we can see that the business necessitates debt financing to create a reasonable return for equity holders. This would be appropriate for a stable, positive FCF business, but as the recent share price collapse has shown, the operating model may not be as resilient as many would assume.
The business:
PBA is an energy infrastructure company that allows investors to participate in the oil and natural gas liquids industry across Canada and North Dakota. They are primarily a midstream operator whose 8,800 km pipeline network transports hydrocarbon products and extends across much of Alberta and parts of British Columbia, Saskatchewan and North Dakota. They also operate some natural gas terminals and processing plants.
The business is largely (and increasingly) run on a fee-for-service basis. ~64% of revenues are on a volume basis which is expected to increase to ~80% by 2018 after the completion of some major infrastructure projects. Management believes that their future projects are much needed, already being backed by 40 customers under long-term, firm-service agreements. Many of the remaining revenues are run on take-or-pay contracts, where customers are responsible for toll/fee payment regardless of actual volumes shipped.
All of this adds up to a business that should reduce its commodity price-related revenues significantly by 2018.
Growth opportunities:
Despite the recent fall in commodity prices, management is moving forward with some ambitious projects. Notably, however, most of these are run on the fee-for-service model and are already backed by committed customers.
Is the price correction overdone?
Markets over the past several months have been dramatically more challenging for the energy industry than in recent years, especially with respect to commodity pricing. While exposed to the energy industry, PBA is increasingly becoming a fee-for-service provider, derisking themselves from commodity price swings.
As a volume-based business, PBA needs to have customers continuing to pump out raw materials for transport. Even though PBA’s revenues are not directly contingent upon commodity price swings, should their customers drilling become uneconomic, PBA would hurt on volumes. At current levels, most of their serviced regions look to be approaching break-even. This would imply that any further deterioration in commodity prices may bring revenue pressures.
If their major underlying commodity exposures either hold in price or revert back towards pre-crisis levels, however, PBA is well-positioned. Management has a history of bringing on successful projects, within budget and on time.
Valuation:
At these levels, PBA shares look very attractive if your belief is that commodity prices will stabilize or improve. With a pipeline of committed projects expected to come online over the next few years, PBA should have solid revenue growth should it see the volumes it expects.
For more ideas like this one, reference GuruFocus’ Historical Low P/S Screener.
