On Jan 18, 2014, Zacks Investment Research upgraded Pembina Pipeline Corporation (PBA) to a Zacks Rank #1 (Strong Buy).
Why the Upgrade?
Pembina Pipeline reported positive earnings surprises in 2 out of the past 4 quarters with an earnings beat of 32.6%. In the third quarter of 2013, the company’s top and bottom line surpassed the year-ago figures, primarily on the back of higher propane prices and an increase in volumes as a result of increased operations.
Calgary, Canada-based Pembina Pipeline offers transportation and midstream services for energy companies in North America through its four segments – Conventional Pipelines, Oil Sands & Heavy Oil, Gas Services, and Midstream.
On Nov 28, 2013, the company announced that it plans to invest approximately $1.42 billion (C$1.5 billion) under its 2014 capital spending program, higher than the 2013 level. Pembina Pipeline intends to allocate a substantial portion of the fund to its conventional pipeline operations and midstream activities to meet increased demand from upstream operators.
To meet this increasing demand, Pembina Pipeline is focusing on infrastructure development. The company completed the first phase of the Low Vapour Pressure Expansion project and the first phase of the Peace and Northern natural gas liquids Pipeline Systems project. The company now plans to construct the second phase of the two above mentioned projects, thereby increasing capacity further.
Apart from these internal growth plans, the company is also following a systematic inorganic expansion strategy to develop transportation and storage facilities. Scheduled completion and integration of acquisitions will enable the company to serve more customers, backed by winning long-term service contracts.
We note that Pembina Pipeline has a steady dividend payment record. During the first nine months of 2013, the company paid approximately $0.15 billion (C$1.6 billion) as cash dividend. The practice of returning wealth to shareholders will help it to attract investors.
The present valuation also makes Pembina Pipeline attractive. As of Jan 20, 2014, the company’s forward P/E multiple was 28.5x, a premium of 16.3% to the peer group average of 24.5x. The company’s return on equity (“ROE”) was 7.9%, marginally higher than the peer group average.
Other Stocks to Consider
Some other stocks worth considering in the oil and gas pipeline industry include QEP Midstream Partners, LP (QEPM), EQT Midstream Partners LP (EQM) and American Midstream Partners, LP (AMID). While QEP Midstream holds a Zacks Rank #1 (Strong Buy), EQT Midstream and American Midstream carry a Zacks Rank #2 (Buy).
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