Lock In a 5% Yield by Buying Pembina Pipeline Corp. (TSX:PPL)

Pembina Pipeline Corp. (TSX:PPL)(NYSE:PBA) is an attractive dividend-paying play on higher oil.

| More on:

Weaker oil has left some pundits concerned that another price collapse could be on the way with the North American benchmark West Texas Intermediate (WTI) trading at below US$65 a barrel. While WTI is likely to remain range bound for some time, it shouldn’t prevent investors from bolstering their exposure to crude. One of the best means of doing so is by adding Pembina Pipeline (TSX:PPL)(NYSE:PBA) to your portfolio and locking in a dividend yield of just over 5%.

Now what?

Pembina reported strong third-quarter 2018 results, which included EBITDA almost doubling compared to a year earlier to $732 million and net income tripling to $334 million. This significant increase in earnings was driven by a notable uptick in the volumes of oil and natural gas transported by Pembina’s pipeline network.

For the quarter, the total volume transported rose by an impressive 34% year over year to 3.5 million barrels daily. That — along with the $9.7 billion Veresen Inc. acquisition as well as new assets coming online during the first half of 2018 and higher oil prices — gave Pembina’s fee-based revenue a solid lift. This more than offset a 21% year-over-year increase in operating expenses.

The strong quarterly result coupled with a solid performance from previous quarters leaves Pembina on track to meet its 2018 guidance. The company expects adjusted EBITDA of $2.75-2.85 billion for the year, which, at the bottom end, is 62% greater than 2017.

Pembina’s earnings are secure because 64% of its fee revenue is earned from take-or-pay contracts. The company’s earnings should continue to grow at a steady clip because Pembina has a large portfolio of projects under development, including $3.1 billion worth of assets under construction, which are expected to enter service by the end of 2020. There is also another $4.5 billion of uncommitted projects in the pipeline.

Because of Canada’s transportation constraints, which are preventing oil producers from getting their product to key U.S. refining markets, there will always be strong demand for Pembina’s infrastructure and services. It those pipeline capacity constraints which are responsible for the considerable buildup of oil reserves in Western Canada; reserves have reached record levels, causing the spread between WTI and Canadian heavy oil known as Western Canadian Select (WCS) to widen significantly. By the end of October 2018, the discount applied to WCS had risen substantially to see it trading 61% lower than WTI. This underscores the need for Canada to expand its pipeline network and why demand for Pembina’s assets as well as services will remain strong.

Pembina also has a 50% interest in developing a polypropylene plant with Petrochemical Industries Company K.S.C. The project has an estimated $4 billion capital cost and is anticipated to be capable of producing around 550,000 metric tonnes per annum of polypropylene. The plant, on completion, will be able to take advantage of the low prices for natural gas in Alberta and thus should be a highly profitable venture once it enters service. Pembina’s Jordan Cove Liquefied Natural Gas (LNG) project on completion will allow it to take advantage of the growing demand for LNG, which is expected to roughly double over the next 12 years.

The company also finished the third quarter in a solid financial position, holding $300 million in cash and $2.2 billion remaining undrawn on an existing credit facility. 

So what?

Pembina remains one of the most appealing means for investors to bolster their exposure to crude. Not only does it possess a wide moat and contractually protected revenues, but the growing demand for the utilization of its infrastructure will give earnings a solid lift, which should cause its stock to appreciate. If investors buy Pembina now, they can lock in a reliable regularly growing dividend, which is yielding a juicy 5%.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium service or advisor. We’re Motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer, so we sometimes publish articles that may not be in line with recommendations, rankings or other content.

Fool contributor Matt Smith has no position in any stocks mentioned. Pembina is a recommendation of Dividend Investor Canada.

More on Dividend Stocks

Train cars pass over trestle bridge in the mountains
Dividend Stocks

Is CNR Stock a Buy, Sell, or Hold for 2025?

Can CNR stock continue its long-term outperformance into 2025 and beyond? Let's explore whether now is a good time to…

Read more »

coins jump into piggy bank
Dividend Stocks

The Smartest Dividend Stocks to Buy With $500 Right Now

These top dividend stocks both offer attractive yields and trade off their highs, making them two of the best to…

Read more »

Middle aged man drinks coffee
Dividend Stocks

Here’s the Average TFSA Balance at Age 35 in Canada

At age 35, it might not seem like you need to be thinking about your future cash flow. But ideally,…

Read more »

ETF stands for Exchange Traded Fund
Dividend Stocks

How to Invest Your $7,000 TFSA Contribution in 2024

Here's how I would prioritize a $7,000 TFSA contribution for growth and income.

Read more »

a man relaxes with his feet on a pile of books
Dividend Stocks

CPP Pensioners: Watch for These Important Updates

The CPP is an excellent tool for retirees, but be sure to stay on top of important updates like these.

Read more »

Technology
Dividend Stocks

TFSA Investors: 3 Dividend Stocks I’d Buy and Hold Forever

These TSX dividend stocks are likely to help TFSA investors earn steady and growing passive income for decades.

Read more »

four people hold happy emoji masks
Dividend Stocks

Love Dividend Growth? Check Out These 2 Income-Boosting Stocks

National Bank of Canada (TSX:NA) and another Canadian dividend-growth stock are looking like a bargain going into December 2024.

Read more »

An investor uses a tablet
Dividend Stocks

A Dividend Giant I’d Buy Over Enbridge Stock Right Now

Enbridge stock may seem like the best of the best in terms of dividends, but honestly this one is far…

Read more »