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Pembina Pipeline Gets a Big Earnings Boost From Its New Assets

By Tyler Crowe - Updated May 8, 2017 at 8:11AM

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Pembina's big significant growth spending plan is starting to impact the bottom line, but the best is yet to come.

Pembina Pipeline (PBA -0.31%) is starting off on the right foot in 2017. A few years back, the company launched an ambitious growth plan that would add several billions of dollars' worth of projects to its asset portfolio in 2016 and 2017. Several of those assets coming on line had a profound impact on the company's results in the first quarter, but the assets that have yet to come on line will have an even greater impact. 

If that weren't enough, it is also looking to grow by making a major acquisition. Here's a look at the company's most recent results, what growth projects remain, and what this new acquisition could mean for the future of Pembina Pipeline.

Oil and gas pipelines

Image source: Getty Images.

By the numbers 

Metric*Q1 2017Q4 2016Q1 2016
Revenue $1,485 million $1,251 million $1,017 million
Operating margin $407 million $376 million $315 million
Net income $205 million $131 million $102 million
Earnings per share $0.49 $0.28 $0.23

*All results in Canadian dollars. Data source: Pembina Pipeline earnings results. 

2017 is where the rubber hits the road for many of Pembina's largest projects, and that is starting to show up in the company's quarterly results. Revenue, operating margin, and net income were all up substantially compared to the same quarter year over year thanks to about $1.7 billion Canadian dollars in new projects that came on line in 2016. The recent gains have mostly come from those assets ramping up to full capacity. 

We could see even larger increases in the coming quarters, though, as the company completes two of its most major growth projects. Pembina's management estimates that its CA$2.4 billion phase 3 natural gas liquids pipeline expansion is nearly complete and should be on stream in July. This project has been so popular with customers that management has already given the green light for phase 4 and phase 5 of the pipeline project for CA$325 million and will have it ready by the end of 2018. It's likely that these projects will be a part of the 20-year infrastructure development service agreement Pembina signed with Chevron (CVX -1.50%) earlier in the year. 

The other major assets set to commence operations is the third fractionation unit at its Redwater complex. All construction activity at the facility is complete, but it is still in the process of commissioning. With all of these new natural gas pipelines, Pembina has several opportunities to get into the natural gas liquids processing game. On top of Redwater, the company recently announced it would build a propane dehydrogenation unit and a propylene manufacturing facility, and it's looking into the feasibility of a propane export facility out of Prince Rupert, British Columbia. 

The big move

Pembina's organic growth investments alone are enough to make any investor happy. Management estimates that once all projects come on line in 2018, annual EBITDA will be about double what it was in 2015. For a slow-growth business like oil and gas pipelines and processing, that kind of growth is rare. 

Pembina's management doesn't seem to think that is enough, however, as it recently announced it would acquire natural gas transportation and processing company Veresen for CA$9.7 billion. The two companies have several overlapping interests, especially in the Duvernay shale basin in Alberta. The combination of the two will likely create some operational efficiencies and increase total growth opportunities. 

Asset map that shows Pembina and Veresen's combined footprint.

Data source: Pembina investor presentation.

The deal has yet to close, but Pembina's management appears optimistic that the deal will get done. 

What management had to say

CEO Mick Dilger commented on the work Pembina has accomplished recently and talked about some new opportunities coming down the pipe.

We've had a very successful start to a transformational year in 2017. I'm happy to report that we delivered another quarter of solid financial results and record volumes on our systems, reaching over two million barrels of oil equivalent per day. Our business development successes so far this year have also been impressive. We secured an exciting opportunity to grow our presence in the Duvernay through our previously announced infrastructure development and service agreement, announced [CA]$325 million in capital for our Phase IV and V pipeline expansions and identified a potential west coast propane export terminal site.

What a Fool believes

We're still in the early innings of Pembina's major growth push. By the end of the year, its largest investments -- the phase 3 NGL pipeline and the Redwater fractionation units -- should be running at full capacity. On top of that, we could also see the Veresen deal get approval. If Pembina can complete and commission these projects without a hitch and close the deal with Veresen, then its bottom line should grow by more than double what it is today.

Beyond this surge of new projects in 2017, it looks as though Pembina could go through a bit of a lull for a couple of quarters while it makes the final investment decision on new projects. Based on the deal it made with Chevron, though, finding new projects shouldn't be an issue. Pembina is looking better and better by the day, and investors may want to consider taking a look at shares before all these projects are complete. 

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Stocks Mentioned

Pembina Pipeline Corporation Stock Quote
Pembina Pipeline Corporation
$35.35 (-0.31%) $0.11
Chevron Corporation Stock Quote
Chevron Corporation
$144.78 (-1.50%) $-2.20

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