Is Pembina the Pipeline to Profits?

With more than 5,400 stocks to choose from, the universe of investment possibilities is enormous. You could get tips over the company water cooler or from Internet discussion boards. A better way might be to look for stocks based on what you already know and own.

Motley Fool CAPS helps you focus your energies by providing you with a personalized Stock of the Day. Using its supercomputer, it looks at stocks currently in your active pick list, stocks picked by highly rated players with lists similar to yours, industries in which you currently have active picks, and targeted areas in which you already have an interest.

By pairing up the opinions of some of the top investors in the CAPS community, CAPS provides you with a handful of companies on which to begin your own due diligence and research.

Buy what you know
No doubt based on my interest in the oil, gas, and consumable fuels sector -- where I've rated the likes of SandRidge Energy (NYSE: SD  ) and Kodiak Oil & Gas (NYSE: KOG  ) to outperform the broad indexes, while also rating Enerplus (NYSE: ERF  ) and EXCO Resources (NYSE: XCO  ) to underperform -- the CAPS supercomputer thought I also might be interested in another energy play, this time, Canadian oil and gas pipeline operator Pembina Pipelines (NYSE: PBA  ) . It was one of five Stocks of the Day it offered up for my consideration this week.

With gas prices at the pump hitting record highs in some areas (more than $5 a gallon in California!), let's see what Pembina has going for it that might warrant an investment, even if the supercomputer hasn't yet picked it for you. Just remember, as smart as the CAPS algorithm may be, it's still just an algorithm, so be sure to look before you leap on any of its suggestions.

Pembina Pipelines snapshot

Industry

Energy

Sector

Oil, Gas, and Consumable Fuels

Market Cap

$8.0 billion

Revenues (TTM)

$2.2 billion

1-Year Stock Return

8.5%

Return on Investment

N/A

Estimated 5-Year EPS Growth

N/A

Dividend & Yield

$1.66/6%

Recent Price

$27.60

CAPS Rating (out of 5)

*****

Source: FinViz.com. N/A = not available. TTM = trailing 12 months.

Leaping to the fore
Oversupply, and low prices in natural gas, is herding drillers into oil and natural gas liquids, but prices are weakening and profits narrowing as a result. Fitch Ratings anticipates supply will outpace demand, and prices will continue dropping this year and throughout 2013.

ConocoPhillips (NYSE: COP  )  reported earnings that were weighed down by a 27% decrease in natural gas liquids (NGL) pricing, while Cabot Oil & Gas (NYSE: COG  ) recorded liquids production 61% higher than a year ago. And showing the industry hasn't yet had its fill, Continental Resources (NYSE: CLR  ) says it plans to triple its production and proven reserves by the end of 2017, because it will be focusing on its oil and NGL assets in both the Bakken and Anadarko Woodford regions.

According to the market researchers at IHS Global Insight, investors can expect almost $2 trillion worth of investments to be made in pipelines, transport, and storage facilities by 2035, but with some of the heaviest action coming within the next few years. It's one of the reasons I hold pipeline operators in such high esteem. Toll-takers such as Pembina, Kinder Morgan Energy Partners (NYSE: KMP  ) , and Atlas Pipeline Partners (NYSE: APL  ) don't care what the price oil is -- the coin drop will happen regardless. While a steep recession may reduce demand for refined products leading to decreased throughput, the anemic recovery isn't going to affect their results very much.

From a frog to a king
Pembina, though, seems to enjoy a premium valuation compared with most of its peers. At 31 times earnings estimates, it's well ahead of ONEOK Partners (NYSE: OKS  ) and more than twice that of Buckeye Partners (NYSE: BPL  ) . Canada may have a surfeit of demand for its unconventional oil and gas sources, but the pipeline operator appears to be a bit rich, especially at nearly four times its sales.

I'll withhold a rating on Pembina Pipeline on CAPS at this time because, while I think the future looks bright for it, a pullback in price would make it more attractive. But tell me in the comments box below at what price you think it would be a bargain.

No buzzkill here
Investors were startled after SandRidge plummeted when natural gas prices reached 10-year lows, but with the company halfway through its ambitious three-year plan to profitability, the future looks bright. If you're unsure about the future of this emerging oil and gas junior and are looking to find out more about its strengths and weaknesses, you should view this brand-new premium report detailing SandRidge's game plan and what to expect from the company going forward. To get started, click here!


Fool contributor Rich Duprey and The Motley Fool have no positions in the stocks mentioned above. Motley Fool newsletter services recommend Kimberly-Clark and ONEOK Partners. Try any of our Foolish newsletter services free for 30 days. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.


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