Pembina Pipeline Corp (TSX: PPL)(NYSE: PBA) owns and operates 8,300 km of pipelines that transport conventional oil and natural gas liquids, 1,650 km of oil sands pipelines, 375 km of gas gathering pipelines, three gas processing plants, a network of liquids truck terminals and terminal hub locations, extraction and fractionation facilities, and cavern storage.
Its pipeline network extends across much of Alberta and B.C. and transports approximately half of Alberta’s conventional crude oil production, about 30% of the natural gas liquids produced in western Canada, and virtually all of the conventional oil and condensate produced in B.C.
Second-quarter profit decreased by 30%, but no real reason for concern
The company reported a 30% decline in second-quarter profit to $0.21 per share from $0.30 per share a year ago. This was lower than the consensus expectation. The question is whether this should be a cause for concern for investors.
The short answer is no — revenue, operating profit, and EBITDA were all considerably higher than the previous year. EBITDA as a key measure of financial and operating performance increased by 27% to $235 million — considerably higher depreciation and amortization charges, finance costs, and income tax expenses explain the bulk of the difference between EBITDA and net profit. These are mostly non-recurring and/or non-cash items with minimal bearing on the longer-term performance of the business.
Sound all-round operational performance
At the operational level the company performed very well, with three of the four operating units reporting higher operating profits.
Conventional oil and gas pipelines increased operating profits by 19% to $77 million and average throughput by 18% to 573,000 barrels per day. These increases were largely the result of capacity expansions commissioned in December 2013, which allowed for the receipt of higher volumes at existing connections and truck terminals, as well as the addition of new connections.
The oil sands and heavy oil transport business reported an unchanged operating profit of $33 million on slightly higher contracted capacity of 880,000 barrels per day.
The gas services business, which provides natural gas gathering and processing services, increased operating profits by 53% to $26 million and improved average volume processed by 81% to 87,000 barrels of oil equivalent per day. This strong improvement was mainly the result of the new Saturn I facility, which came into service in October 2013, as well as higher volumes and increased processing fees.
The oil midstream service includes truck terminal and storage facilities, and the gas midstream business provides extraction, fractionation, and storage services. The combined business improved operating profits by 42% to $131 million. On the oil side the increase was largely due to stronger margins and higher volumes, and on the gas side the improvement is ascribed to better propane pricing as well as higher fee-for-service storage revenue related to two new caverns being placed into service.
Operational cash flow and considerable capital expenditures
Adjusted cash flow from operating activities was $191 million during the second quarter of 2014 compared to $150 million during the second quarter of 2013. For the six months ending June 30th, adjusted cash flow from operating activities was $455 million, or 29% higher than the same period last year. However, the company has a considerable capital expenditure program and spent $585 million during the first six months of the year, which resulted in a negative free cash flow for the period.
Free cash flow, an important determinant of the business’s ability to pay and grow dividends, has been negative every year since 2011 as the company has ramped up capital expenditures to take advantage of perceived growth opportunities. Planned capital expenditures for 2014 amount to $1.7 billion, and the company already has total capital commitments of almost $5 billion over the next few years.
Stable business with an excellent dividend payment record
A key attraction for many investors would be the stable and reasonably predictable income stream of the company, which results in a consistent and growing dividend stream. Dividends per share increased by 5% per year over the past 10 years and the yield on the current price is 3.7%.
The capital expenditures are not placing undue strain on the balance sheet or cash flows as yet, but they will have to be watched carefully for any potential impact on the dividend payments.
