Canadian midstream company Pembina Pipeline (PBA +3.13%) has been an excellent dividend-growth stock over the years. Not only does it pay its investors on a monthly basis, but it has consistently increased its payout, which it has expanded at a 5% compound annual growth rate over the last decade. That trend should continue for at least the next several years after the company sanctioned a large-scale expansion project, which significantly enhances its long-term growth prospects.
Expanding downstream
In early February, Pembina Pipeline and its Kuwaiti partner made a positive final investment decision (FID) on an integrated petrochemical facility in Canada. Pembina Pipeline will invest 2.5 billion Canadian dollars ($1.9 billion) into constructing two plants as well as the supporting facilities. This complex will consume propane produced by Pembina's adjacent Redwater Fractionation complex, which separates higher-value products like propane and ethane out of the raw stream of NGLs (natural gas liquids) that comes from oil and gas wells. The complex will transform this propane into polypropylene, a petrochemical used in making products such as autos, medical devices, food packages, and home electronic appliances.
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Pembina Pipeline has secured long-term contracts with third parties for more than 40% of the EBITDA (earnings before interest, taxes, depreciation, and amortization) it expects these facilities to produce. However, the company anticipates boosting that percentage, with a stated goal of having long-term contracts support at least 50% of the facility's EBITDA. The company expects this project to start service by the middle of 2023 and should generate CA$275 million to CA$350 million ($209 million to $267 million) in annual adjusted EBITDA for Pembina, which is a needle-moving amount considering that it expects to produce CA$2.8 billion to CA$3 billion ($2.1 billion to $2.3 billion) in adjusted EBITDA this year.
Check out the latest Pembina earnings call transcript.
This project is a key step in Pembina's efforts to expand its business further downstream in the oil and gas value chain, so it can capture more of the value created by the hydrocarbons it transports and processes. In greenlighting this project, Pembina is mirroring the growth strategy of U.S. midstream giant Enterprise Products Partners (EPD +1.40%). That company has been expanding its petrochemical midstream-services businesses over the years and finished a similar petrochemical plant in 2017. Enterprise Products Partners followed that up by pushing further downstream last year, after sanctioning another petrochemical plant that should come online later this year.
More growth in the pipeline
Pembina Pipeline's petrochemical growth project is just the latest in a string of recent expansions sanctioned by the company. Last November, the midstream company moved forward with the development of CA$1.3 billion ($1 billion) of new pipeline and processing infrastructure, including Phase VII of its Peace Pipeline system. The company followed that up at the end of January by giving the green light to Phase VIII of the Peace system. This latest expansion, which will cost CA$500 million ($380 million), should start service in stages beginning next year through the first half of 2022. With those expansions, Pembina now has secured CA$5.5 billion ($4.2 billion) of investments that should enable the company to grow earnings at a steady pace for the next several years, which should support continued dividend growth.
Meanwhile, the company has several other expansions in development. The largest is the Jordan Cove LNG facility, which would export liquefied natural gas from the coast of Oregon. That project represents as much as a CA$6.5 billion ($5 billion) investment opportunity that the company hopes to sanction this November. If that happens, it could be generating cash flow by 2024. In addition to that needle-moving opportunity, Pembina has CA$4 billion ($3.1 billion) of additional projects under consideration, including future expansions of Peace River. Overall, the company could invest upwards of CA$16 billion ($12 billion) to expand its footprint, which is a massive opportunity considering that it currently has a $25 billion enterprise value.
Don't miss out on this income growth stock
Most investors have completely overlooked Pembina Pipeline because it's a Canadian company. Because of that, they're missing out the opportunity to collect a monthly dividend that has consistently increased over the years. That trend appears very likely to continue, given the company's rapidly expanding backlog of growth projects that should enable it to boost earnings and the dividend at a healthy rate for at least the next several years.
