As of August 13, we are upgrading Pembina to a Sector Outperformer from Sector Performer with a $29.00 price target ($27.75 previously) and 17.3% 12-month total return. Our valuation reflects a combination of 12.5x EV/ H2/13 and H1/14 EBITDA and a 5.5% target yield.
We believe Pembina Pipeline Corporation is a high-yield, high-growth way to play growing conventional oil, oil sands, and liquids-rich gas production in the WCSB. In our view, Pembina's highly integrated and substantial legacy asset footprint ideally positions it to capture growth in these areas.
Despite seasonally weak NGL prices and high propane storage levels we expect near-term and long-term fundamentals to improve. Potential upside catalysts include: (1) dividend increases, (2) recovery in propane prices, and (3) further clarity on the portfolio of potential growth projects.
We expect Pembina to increase its dividend 3% - 5% annually over the next four years. Dividend growth is supported by higher throughput volume on its conventional pipeline system, a modest recovery in propane prices, and over $1.7B of risked capital growth projects.
---- Despite seasonally weak NGL prices and high propane storage levels we
expect near-term and long-term fundamentals to improve. -----
It's not obvious to me why NGL pricing is expected to improve.
Gas producers like ECA and CHK have moved away from dry to wet gas drilling and that will remain the case as long as natgas prices remain low compared to historical values. This has and will continue to boost output of NGL's on the supply side. I'd only expect natgas prices to move up significantly when LNG export terminals are completed on the west coast (2017).
Demand side increases should be minimal with the economy in slow growth mode. Tarsands producers appear to be holding back on new project development and light oil from plays in Bakken will probably keep tarsands growth in check at least until KeystoneXL is operational (2016).
So yeah long term looks good but near term I don't see any driver.