Boosting Our Pembina Valuation After Increasing Tariff Forecast

After taking a deeper look at Pembina’s PPL fourth-quarter results, we are boosting our fair value estimate to CAD 41/$30 from CAD 37/$27. The change is mainly due to higher near-term cash flows, including higher tariffs in 2023 to incorporate higher inflation-linked pricing. Our model also includes the pending sale of the 50% interest in KAPS for CAD 662.5 million and the Ruby pipeline payment as part of its bankruptcy for CAD 102 million.

Generally, Pembina’s fourth-quarter results and its 2023 guidance met our expectations. Full-year EBITDA came in at CAD 3.7 billion, matching our CAD 3.7 billion forecast. In comparison, our 2023 EBITDA forecast of CAD 3.7 billion sits within Pembina’s guided range of CAD 3.5 billion-CAD 3.8 billion.

With leverage at around 2.5 times, and excess cash flow of about CAD 800 million expected in 2023, we think it is possible that Pembina will be back on the M&A trail for another sizable deal to goose expected EBITDA growth over the coming years. Management has not been shy on this front, and we think it wants to achieve high-single-digit EBITDA growth versus what we think is a more realistic 2%-3% maintainable EBITDA growth with its current portfolio.

While Pembina’s earnings are expected to decline modestly in 2023 (about 2%), we do see a number of healthy developments at its fee-based business. The Pembina Gas Infrastructure transaction is capturing several attractive opportunities across multiple assets (Hythe gas plant, Dawson, Cutback complex, and the Resthaven facility), boosting volumes, and customers are already looking for debottlenecking expansions at other facilities. Pembina also announced the construction of a CAD 460 million propane-plus fractionator at its Redwater complex underpinned by take-or-pay contracts. We see this as an attractive way to boost fee-based income and keep customers part of the Pembina system.