Opportunities are everywhere, and sometimes you can find them just across the border. Pembina Pipeline (NYSE:PBA) is such an example. While it is headquartered in Canada, it also trades on the New York Stock Exchange. The company provides midstream services to oil and gas companies and has operations in both Canada and the U.S. Due to the overall market pessimism surrounding the industry, the stock on NYSE declined 34% from its high in 2014. While this decline can be partly attributed to the decline of the Canadian Dollar, a similar decrease can be seen on the shares that are traded on the Toronto Stock Exchange, which slid 24% over the same period.
At a glance, Pembina's 4.5% yield is very attractive for dividend investors, but the key issue is whether the company can maintain this distribution going forward.
The company operates a network of pipelines and terminals. They provide a steady stream of income as services are fee-based and often follow take-or-pay arrangements. The operating margin over the past couple years hovered at a constant 9% as well. Because Pembina is only involved in midstream activities, it does not have direct exposure to commodity movements, allowing it to maintain these stable margins.
Pembina is also able to establish long-lasting relationships with customers. The company's multiple service offerings make it a one stop shop for midstream services, making it one of the dominant players in the market. For example, it is able to capture long-term contract revenue from connected facilities using pipelines, and unconnected facilities using trucking terminals. As management puts it: "It is difficult for a competitor to replicate the service offering that Pembina provides."
It has not missed a single payment over the past couple of years. It is also worth mentioning that the company was able to maintain distributions throughout the financial crisis in 2008. Since then, the company has steadily raised dividends, from 12 cents per month to the current monthly rate of 15.25 cents. There is no doubt that the midstream business will continue to play an integral role in the energy industry, so you shouldn't worry that the business model will falter in the near future.
However, we should still investigate the company's financial profile and see if it has the capacity to maintain its current distribution. If so, Pembina would no doubt be an excellent opportunity for income investors.
During the first quarter, oil reached its lowest point in six years. While Pembina had a comparatively poor performance in the first quarter, its financials are still adequate to support the current level of distribution. Quarterly cash from operations stood at C$120 million, while only C$72 million worth of dividends were paid. Keep in mind that this was when the entire industry was most stressed -- meaning that even if Pembina maintains its first quarter performance, its operating cash flows will still comfortably cover the dividend.
Is the company's high capital expenditure a concern? In the quarter, the company had a net cash outflow of $C478 million for various investments. This may seem excessive, as the figure is far larger than the operating cash flow and dividend payment. The important distinction to make here is that the company is investing for growth. The company announced capital spending guidance last December, and expects the majority of projects to come online before mid-2017. The net investment in the quarter is also much larger than the depreciation of $57 million, reflecting the fact that the company is not merely replacing assets, but growing them. These investments are also expected to deliver more than C$700 million of EBITDA annually, nearly doubling the TTM EBITDA of C$850 million, making these investments the basis for future distribution growth.
A Foolish conclusion
Pembina's business is very stable and will provide a steady stream of cash flow for a long time. The current opportunity arose due to the overall market sentiment about the industry and not because of any deterioration of fundamentals. Even if you are pessimistic about commodities, know that the company's midstream operation should be able to deliver value at both low and high commodity prices. In any case, it would seem that now may be a good time for dividend investors to jump at this opportunity.