Pembina Pipeline Preferred Shares: Small Risk, Big Returns

10 months ago

3D render of the operation of the state tube Nord Stream 2. The conception of sanctions and economical war, an anvil falling connected a state pipe. 3D rendering

***All figures successful CAD unless different noted.

Introduction

The marketplace is ripe with discounted preferred shares that person the imaginable to present tremendous returns implicit the adjacent mates of years. Recent articles I person written connected Seeking Alpha see AltaGas Series B And H Preferred Shares: Found Money, RPT Realty: A Low Risk Preferred Share Offering With A 7% Yield, and Imperial Petroleum: A Juicy 11% Yield On Preferred Shares. I person decided to sermon different large accidental successful the Pembina Pipeline Corporation (TSX:PPL:CA).

The Company

PPL owns and operates lipid and earthy state pipelines, processing facilities, and logistics services including an export terminals business. PPL's assets are chiefly located successful Western Canada. The concern is divided into 3 segments, which see pipelines, facilities, and selling and caller ventures. The pipelines conception accounts for 55-60% of cashflows. The pipeline part operates 18,000 kilometers of pipelines for the transport of crude oil, earthy gas, and earthy state liquids.

The concern is divided into 3 segments, which see pipelines, facilities, and selling and caller ventures though pipelines relationship for 55-60% of cashflows. Pembina Pipeline enters into semipermanent contracts that are usually 5-10 years wherever the institution stores and transports resources for customers. PPL is compensated based connected the measurement of resources handled, not connected their value. In fact, betwixt 80% and 90% of Pembina Pipeline’s currency travel comes from instrumentality oregon pay/fee for work contracts. This is the crushed wherefore the company's currency flows are not astir arsenic volatile arsenic commodity prices. Although accumulation whitethorn autumn erstwhile commodity prices fall, PPL maintains currency flows by requiring minimum measurement commitments successful its contracts. 80-85% of counter-parties are investment-grade which see a 20-year midstream services statement with ConocoPhillips Canada (COP) for the proscription and fractionation of liquids and different semipermanent services statement with Tourmaline Oil Corp. (TOU:CA) for the proscription and fractionation of liquids from their multiphase NEBC Montney development.

Q3 2022 Report

Strengthening lipid and earthy state prices person led to higher production, truthful it should beryllium nary astonishment that gross and profitability is up crossed the committee for PPL successful their Q3-2022 results. EBITDA accrued 15% YoY contempt a $74 Million summation successful powerfulness and substance costs, and a $39 Million summation successful wage and wage expenses.

$2.8 Billion summation successful revenues, was mostly owed to an summation successful crude oil, NGL and earthy state marketplace prices, higher volumes connected the Peace Pipeline strategy and higher tolls mostly owed to inflation, combined with higher volumes connected the Cochin Pipeline and higher recoverable costs, partially offset by little contracted volumes connected the Nipisi and Mitsue Pipeline systems and little gross from the Field-based Gas Processing Assets contributed to PGI and present reflected successful stock of nett from equity accounted investees.
$358 Million summation successful EBITDA, chiefly owed to higher margins connected crude oil, NGL, and earthy state sales, higher contributions owed to the beardown show of the PGI assets, higher contributions from Aux Sable and Alliance, higher volumes connected the Peace Pipeline strategy and connected the Cochin Pipeline, higher tolls owed to inflation, little losses connected commodity-related derivatives, and higher recoverable costs from the Horizon Pipeline system.

In August of 2022, Pembina completed its antecedently announced associated task transaction with KKR & Co., Inc. to harvester their respective occidental Canadian earthy state processing assets into a single, caller associated task entity called Pembina Gas Infrastructure Inc. (PGI). The state processing entity volition person a combined capableness of astir 5 cardinal cubic feet per time (approximately 3 cardinal cubic feet per time nett to PPL) and serving customers from cardinal Alberta to northeast British Columbia.

Pembina owns 60 percent of PGI portion KKR's planetary infrastructure funds ain the remaining 40 percent. Pembina volition service arsenic the relation and manager of PGI. Pembina contributed to PGI its wholly-owned field-based state processing assets, which see the Cutbank Complex, the Saturn Complex, the Resthaven Facility, the Duvernay Complex and the Saskatchewan Ethane Extraction Plant, arsenic good arsenic its 45 percent involvement successful Veresen Midstream. KKR contributed to PGI its 55 percent involvement successful Veresen Midstream, arsenic good arsenic its 49 percent involvement successful PGI Processing ULC.

Q3 2022 MD&A

During Q3 2022, operation of the Empress Cogeneration Facility was completed, and brought into work successful November 2022. The installation volition usage earthy state to make up to 45 megawatts of electrical power, thereby reducing wide operating costs by providing energy and vigor to the existing Empress NGL Extraction Facility. Power volition beryllium consumed connected site, thereby supplying up to 90 percent of the site's electrical requirements. Phase IX Peace Pipeline Expansion task was besides brought into service. This enlargement includes caller 6-inch and 16-inch pipelines debottlenecking the corridor northbound of Gordondale, Alberta. The enlargement volition spot existing pipelines, which are presently batching, converted to azygous merchandise lines.

Management has guided for arsenic small arsenic $3.625 Billion and arsenic overmuch arsenic $3.725 Billion for fiscal 2022. As a effect of higher volumes and ostentation adjusted tolls connected accepted pipelines and fractionation facilities, a afloat twelvemonth of higher volumes astatine PGI’s state processing assets absorption is guiding for arsenic overmuch arsenic $3.80 Billion successful EBITDA for 2023 FYE. Profitability maturation volition apt beryllium humble owed to little contributions from the selling concern arsenic good arsenic from the Alliance Pipeline and Ruby Pipelines with the second of which filing for bankruptcy successful 2022 and are accounted for nether the Equity Method. Management has guided for $730 Million successful CAPEX for 2023, truthful adjacent with $1.416 Billion successful communal dividends and $124 Million successful preferred dividends PPL is precise overmuch successful self-funding mode (excluding the interaction of taxes).

The leverage illustration is besides rather favourable with debt-to adjusted EBITDA astatine lone 3.5-3.6x and debt-to-FFO of ~4.5x which makes it 1 of the slightest leveraged midstream companies successful its adjacent radical which includes Enbridge (ENB:CA), TC Energy Corporation (TRP:CA), Brookfield Infrastructure Corporation (BIPC:CA), and Keyera Corp. (KEY:CA). In summation 97% of indebtedness outstanding is fixed complaint with a good staggered maturity illustration and a debased weighted mean involvement complaint of lone 4% truthful rising involvement rates should not materially interaction currency flows.

The Opportunity

It is rather perplexing that the communal shares person dropped 13% since the highs seen successful June 2022 portion currency flows person accrued arsenic good arsenic the monthly communal stock dividend from $0.21 to $0.2175/share. The guardant dividend output volition beryllium astatine slightest 5.6%. PPL communal shares are besides among the cheapest successful its adjacent group, which is perplexing fixed its beardown leverage profile.

Although I americium bullish connected the communal shares and clasp immoderate successful my portfolio the preferred shares correspond a little hazard mode to execute beardown returns which are good covered by run-rate EBITDA. All of PPL's preferred stock offerings are presented beneath and are redeemable each 5 years and if the institution chooses not to redeem they reset astatine the 5-year Canada Bond Yield. On October 14, 2022, Pembina announced its volition to redeem each of the 12 Million issued and outstanding Cumulative Redeemable Minimum Rate Reset Class A Preferred Shares, Series 23. The full redemption terms for the Series 23 Class A Preferred Shares was $300 Million.

The Class A Series 15 (TSX:PPL.PRO:CA) correspond the champion accidental from a axenic income perspective. On August 31, 2022, Pembina announced that it did not mean to workout its close to redeem the 8 Million Cumulative Redeemable Rate Reset Class A Preferred Shares, Series 15 connected September 30, 2022. The yearly dividend complaint for the Series 15 Class A Preferred Shares for the five-year play from September 30, 2022 to September 30, 2027 is 6.164% but has a existent output of 7.37% owed to its discount to par.

The Series 15 Class A Preferred Shares person the highest existent output by acold 178 bps higher than the 2nd highest and 111 bps higher than the median successful the group. It besides has the furthest telephone day and a beardown output to telephone complaint of 10.6% which is adjacent higher than the Series 1 (TSX:PPL.PRA:CA) which is callable successful December 2023.

Investors who judge the hawkish connection being dealt by the BoC whitethorn inactive find the Series 3 (TSX:PPL.PFC:CA), Series 5 (TSX:PPL.PFE:CA), Series 7 (TSX:PPL.PRG:CA), and Series 17 (TSX:PPL.PRQ:CA) attractive. All 4 issues are owed successful 2024. With the 5-year Government of Canada Bond complaint presently astatine 3.24% the rates would reset for astatine slightest 5.8% connected those issues. With excess currency flows and ample capableness connected the $1.5 Billion Revolving Facility ($342 Million utilized) absorption whitethorn find it worthwhile to redeem. In information the Series 5 has a level of 3% truthful would beryllium the astir compelling to redeem. The output to calls connected these issues is astatine slightest 28% and would effect successful tremendous returns if called. PPL.PFC has $300 Million par worth outstanding, PPL.PFE and PPL.PRG person $250 Million par worth outstanding, and PPL.PRQ has $150 Million successful par worth outstanding, truthful redeeming anyone oregon perchance each of these bid is feasible.

There is nevertheless the specified anticipation involvement rates could spell the different mode implicit the adjacent 18 months successful which lawsuit the preferred shares would improbable beryllium called and by holding the ones that are up for redemption successful 2024 would supply measly returns. For those who would similar to not speculate connected involvement rates PPL.PR.O is inactive your champion stake arsenic the dividend is good covered by currency flows and has 59 payments to spell earlier determination is adjacent the anticipation it gets called. Assuming adjacent a 1 notch downgrade from BBB to BB is just for the preferred shares of PPL, just worth would beryllium $22.30/share which is 6.7% supra the existent terms of $20.90/share. High azygous digit oregon debased treble digit returns are acold from unreasonable to expect.

Conclusion

Both the communal shares and immoderate of the preferred shares connection exceptional value. The communal shares volition look stiff contention from lower-risk yields connected corresponding preferred shares, and successful an uncertain market. There are precise fewer midstream companies with specified debased leverage with preferred stock yields this charismatic particularly the Class A Series 15 preferred shares.

Editor's Note: This nonfiction discusses 1 oregon much securities that bash not commercialized connected a large U.S. exchange. Please beryllium alert of the risks associated with these stocks.

This nonfiction was written by

Brant Munro, CFA illustration picture

I americium ever connected the lookout for businesses that person a beardown currency generating quality and a beardown capable competitory vantage that I tin beryllium definite they volition beryllium astir for the adjacent decade, and astatine a terms wherever I tin beryllium arsenic definite arsenic imaginable that I tin execute astatine slightest 15 percent annualized returns, oregon other companies whose terms is profoundly discounted from their plus basal arsenic agelong arsenic its highly marketable. Im not 1 to shy distant from takeover targets, provided the people inactive has a beardown concern that I would beryllium good with owning it adjacent if the takeover did not spell through. Since I began investing connected my ain 3 years agone I person achieved an annualized clip weighted instrumentality of astir 16 percent, and program to proceed to bushed that hurdle arsenic I larn more.

Disclosure: I/we person a beneficial agelong presumption successful the shares of PPL:CA, PPL.PRO:CA either done banal ownership, options, oregon different derivatives. I wrote this nonfiction myself, and it expresses my ain opinions. I americium not receiving compensation for it (other than from Seeking Alpha). I person nary concern narration with immoderate institution whose banal is mentioned successful this article.