Pembina Pipeline Corp: Big Acquisition Makes This 6.4%-Yielding Stock More Compelling
June 10, 2021
Pembina Pipeline Corp Set to Become Pipeline Behemoth
When it comes to midstream oil and gas companies, Pembina Pipeline Corp (NYSE:PBA) was already an industry giant that should have been on investors’ radar. But the company’s recently announced blockbuster acquisition will turn it into a pipeline behemoth.
The acquisition should make buy-and-hold investors happy. Not only does Pembina Pipeline stock pay a high-yield dividend of 6.4%, the company said that, once the deal closes, its monthly dividend will increase by 4.8%. The combined company should also result in long-term appreciation of PBA stock.
Pembina is a leading energy transportation and midstream service provider that has been a leader in the North American energy sector for more than 65 years. The company operates through three divisions: Pipelines, Facilities, and Marketing & New Ventures. (Source: “Operations,” Pembina Pipeline Corp, last accessed June 8, 2021.)
The company’s Pipelines division operates more than 18,000 kilometers (11,200 miles) of conventional, transmission, oil sands, and heavy oil pipelines across North America. The division manages pipeline transportation capacity of 3.1 million barrels of oil equivalent per day, above-ground storage of 11 million barrels, and rail terminaling capacity of approximately 145,000 barrels of oil equivalent per day. (Source: “Pipelines Division,” Pembina Pipeline Corp, last accessed June 8, 2021.)
On top of this, the Pipelines division provides links between the company’s upstream and downstream services across North America. These assets supply products from hydrocarbon-producing regions to refineries, fractionators, and North American market hubs including Alberta, British Columbia, Illinois, and California.
The Facilities division manages Pembina’s natural gas processing and natural gas liquid (NGL) fractional facilities and related infrastructure. This division includes approximately 354,000 barrels per day of NGL fractionation, 21 million barrels of cavern storage, and associated pipeline and rail terminaling facilities. Pembina is in the process of building a liquefied propane export facility on Canada’s west coast. The company also owns a bulk marine export terminal in Vancouver, BC. (Source: “Facilities Division,” Pembina Pipeline Corp, last accessed June 8, 2021.)
The company’s Marketing & New Ventures division sets out to create new markets and enhance existing markets through the development of infrastructure. And at the start of June, this division took a massive leap forward. (Source: “Marketing & New Ventures,” Pembina Pipeline Corp, last accessed June 8, 2021.)
Acquisition of Inter Pipeline Ltd Creates Canadian Pipeline Giant
On June 1, Pembina surprised the oil and gas industry when it announced it was acquiring Inter Pipeline Ltd (TSE:IPL, OTCMKTS:IPPLF) in an all-stock deal worth $8.3 billion. (Source: “Pembina and Inter Pipeline to Combine Highly Integrated and Complementary Businesses to Accelerate Long-term Strategic Plan,” Pembina Pipeline Corp, June 1, 2021.)
The friendly takeover, which is expected to close in the fourth quarter of 2021, will lead to annual cost savings of up to $200.0 million and create one of the largest energy companies in Canada, with a combined market cap of about $24.2 billion.
The proposal trumps a hostile takeover offer for Inter Pipeline Ltd made earlier this year by Brookfield Infrastructure Partners L.P. (NYSE:BIP). Brookfield’s unsolicited offer was for $16.50 per share, whereas Pembina’s offer was for $19.45 per share.
Buying Inter Pipeline Ltd gives Pembina Pipeline Corp additional pipeline infrastructure across western Canada, connecting the region’s oil sands and natural gas producers with domestic and foreign customers.
With the acquisition, Pembina’s integrated and complementary business increases:
- Pipeline capacity from 3.1 to 6.2 million barrels of oil equivalent per day
- Processing capacity from 6.1 to 8.8 billion cubic feet per day
- Fractional capacity from 350,000 to 390,000 barrels per day
- Storage capacity (excluding Europe) from 32 to 38 million barrels
(Source: Ibid.)
Pembina Pipeline Corp also gets Inter Pipeline Ltd’s Heartland Petrochemical Complex, which is still under construction in Alberta. Inter Pipeline has been looking for a partner to help fund its $4.0-billion construction costs.
The Heartland Petrochemical Complex was considered the backbone to Inter Pipeline’s path forward. Once completed, the project, located outside Edmonton, AB, is slated to produce 525,000 tonnes of polypropylene annually. Production is expected to begin in early 2022.
The combined company will be a cash cow. It’s projected that, once in full service, the company will generate $1.1 to $1.4 billion of adjusted cash flow from operating activities after dividends annually. This greatly enhances Pembina’s ability to fund existing and future capital investment.
Monthly Dividend to Increase by 4.8%
Investors love Pembina Pipeline stock because of its high-yield dividend. Paid monthly, PBA stock’s dividend is CA$0.21 per share. Because of the exchange rate, the company’s monthly payout fluctuates a little, but, at the time of this writing, it’s around US$0.17 per share. (Source: “Stock & Dividend,” Pembina Pipeline Corp, last accessed June 8, 2021.)
For income hogs, one of the best parts of Pembina’s acquisition of Inter Pipeline is knowing that once the deal closes, Pembina Pipeline stock’s monthly dividend will increase by 4.8% to $0.22 per share.
And it gets better for this dividend stock.
Once the Heartland Petrochemical Complex is fully operational, the incremental cash flow from the project is expected to support a further increase in PBA stock’s monthly dividend to $0.23 per share.
The Lowdown on Pembina Pipeline Corp
Even before its acquisition of Inter Pipeline Ltd, Pembina Pipeline Corp was a great midstream energy stock that rewarded investors with capital appreciation and frothy dividends.
With Inter Pipeline’s assets, Pembina becomes a more highly integrated energy infrastructure business that puts it in a stronger financial position. Not only will this result in an even higher dividend, but it should also help juice the company’s share price. For income-starved investors, it’s a win-win situation.
