Pembina Preps for Final Investment Decision in Significant Step Forward for Cedar LNG

In a major step forward, Pembina PPL announced that its Cedar LNG project has received an environmental assessment certificate from the B.C. Environmental Assessment Office and signed an agreement with ARC Resources for about half of the project’s 3 million metric tons per year of capacity.

We previously thought competing project Woodfibre LNG might beat Cedar LNG to a final investment decision, or FID. However, with the new developments, Cedar is targeting a FID in the third quarter of 2023 and likely in service in 2027. Given 50% of the capacity is contracted, this strikes us as possible, yet LNG delays are frequent, as we’ve seen with Energy Transfer’s Lake Charles LNG project and TC Energy’s Coastal GasLink pipe for LNG transportation.

Given the lack of insight into capital costs (as 2021 estimates of CAD 2.4 billion to CAD 3 billion are well out of date given inflationary considerations) and the lack of a FID, we will hold off on adding it to our model. As a result, our CAD 41 and $30 per share fair value estimates and no-moat ratings are unchanged. We flag one area of concern: it has a long-term transportation agreement with the Coastal GasLink pipeline, which has faced significant challenges over delays and cost overruns. However, TC Energy’s last update indicated reasonably high confidence that it could meet its end-of-2023 mechanical completion date with commissioning and clean-up work continuing into 2024 and 2025.

It’s also worth noting that Pembina has partnered with the Haisla Nation to share ownership of the project 50/50, so the economics to Pembina would be less material than if it had full ownership. We think the partnership was likely critical to moving the project forward, given the importance of stakeholder relationships in projects of this size and complexity. The fact that the project will be powered by renewable electricity from BC Hydro minimizes the facility’s environmental footprint, which we consider a plus for commercial capacity agreements.