Many investors head to the two mainstays here in Canada being Enbridge (TSE:ENB) and TC Energy (TSE:TRP). However, is Pembina Pipeline (TSE:PPL) the pipeline stock you should be looking at today? Is it currently providing better value and a more lucrative dividend?
Lets take a look.
What exactly does Pembina Pipeline (TSE:PPL) do?
Pembina Pipeline is a midstream infrastructure company that operates in Western Canada and North Dakota. It has around 9,000 KM of hydrocarbon pipelines plus 1,650 KM of heavy oil and oilsands pipelines.
To round out its integrated business it has gas processing facilities and NGL infrastructure.
In terms of pipeline, if we compare it to Enbridge (over 27,000 KM) and TC Energy (over 92,000 KM) Pembina is certainly much smaller. But, it's still a sizable business, with 2020 revenue of $6.2B.
How safe is Pembina Pipeline's dividend? It's paying out way too much right?
If there's one thing many investors do wrong, it's analyzing the dividend of a pipeline company.
If you're looking at a pipeline companies dividend, whether it be Enbridge, Keyera, TC Energy, or Pembina Pipeline in terms of earnings or even free cash flow, you're doing it wrong.
Why? These companies have an extensive amount of CAPEX (capital expenditures) and maintenance costs that can easily deteriorate earnings and cash flows.
But the reality is, all of these pipelines have dividends that are well covered, and in no risk of being cut. The prudent investor knew this, and took advantage in 2020 when prices were at rock bottom.
With a pipeline, you need to look for a handy ratio called the distributable cash flow ratio. This is a payout ratio that is calculated by the individual company themselves, and it is located in its investor presentation.
In terms of Pembina's payout ratio, it does have one of the higher ones in the industry at 72% of distributable cash flows. When we look to a company like Enbridge, it typically hovers in low 60% range. However, the dividend is still safe, and at no risk of being cut.
This makes the company's 6.36% dividend yield an attractive one for income investors, especially considering it pays on a monthly basis. $10,000 invested into Pembina will have you collecting $53 a month in dividends at current price levels.
How reliable are Pembina Pipeline's cash flows?
Just because a dividend is at no risk of being cut now, doesn't mean it won't be at risk in the future.
However, you've got little to worry about with Pembina. That's because nearly 80% of 2020 EBITDA was from take-or-pay contracts. A take-or-pay contract in a nutshell means that regardless of product being shipped, Pembina still gets paid.
The company is also nicely diversified, with over 200 counterparties. Its top 20 customers make up around 70% of total revenue, so losing a single major customer would certainly have an impact, but would not be detrimental to the business.
The company's diversified portfolio of products makes it less susceptible to single commodity price fluctuations as well.
The company currently has 40% exposure to crude oil, 30% to NGL (natural gas liquids), and 30% to natural gas.
New project development is leading the way for Pembina
Pembina is known for completing projects on time, and on budget. This is a rarity in the oil and gas sector, and is certainly something that should be considered by investors.
The company currently has just shy of $900M in projects under development, and has over $4B of potential new projects on the horizon, including its Edmonton Terminal expansion, Cochin expansion, a Cogeneration facility, and a Petrochemical feedstock solution.
Overall, Pembina could be a strong opportunity for those looking outside of the majors
Would it be wrong to opt for a company like Enbridge or TC Energy over Pembina? Certainly not. These companies have reliable dividends and have grown them over multiple decades.
Lets face it, midstream companies are known for their dividends, not capital growth. So, you want to pick the best of the best in that regard.
However, there seems to be somewhat of a value proposition in Pembina Pipeline right now. It isn't the cheapest midstream company on a forward looking basis, that title would go to TC Energy.
But, it's cheaper than other major midstream companies in Enbridge, Keyera, and Gibson Energy. With oil expecting to see a surge in demand, we could see pipeline companies enter a bullish cycle after over a year of relatively sideways movement.
If that does happen, Pembina will be one you want to keep an eye on.
Next check out Canadian Dividend All-Stars for the week of July 26th.