U.S. Markets close in 4 hrs 59 mins

Are Pembina Pipeline Corporation’s (TSE:PPL) Interest Costs Too High?

Collin Greene

The size of Pembina Pipeline Corporation (TSX:PPL), a CA$22.78B large-cap, often attracts investors seeking a reliable investment in the stock market. Market participants who are conscious of risk tend to search for large firms, attracted by the prospect of varied revenue sources and strong returns on capital. But, the key to extending previous success is in the health of the company’s financials. Let’s take a look at Pembina Pipeline’s leverage and assess its financial strength to get an idea of their ability to fund strategic acquisitions and grow through cyclical pressures. Remember this is a very top-level look that focuses exclusively on financial health, so I recommend a deeper analysis into PPL here. View our latest analysis for Pembina Pipeline

How much cash does PPL generate through its operations?

Over the past year, PPL has ramped up its debt from CA$4.16B to CA$7.56B – this includes both the current and long-term debt. With this increase in debt, PPL currently has CA$321.00M remaining in cash and short-term investments for investing into the business. Moreover, PPL has produced CA$1.51B in operating cash flow during the same period of time, leading to an operating cash to total debt ratio of 20.02%, meaning that PPL’s current level of operating cash is high enough to cover debt. This ratio can also be a sign of operational efficiency as an alternative to return on assets. In PPL’s case, it is able to generate 0.2x cash from its debt capital.

Can PPL meet its short-term obligations with the cash in hand?

Looking at PPL’s most recent CA$1.14B liabilities, it appears that the company has not been able to meet these commitments with a current assets level of CA$1.02B, leading to a 0.89x current account ratio. which is under the appropriate industry ratio of 3x.

TSX:PPL Historical Debt Jun 20th 18

Is PPL’s debt level acceptable?

With debt reaching 55.51% of equity, PPL may be thought of as relatively highly levered. This isn’t uncommon for large companies because interest payments on debt are tax deductible, meaning debt can be a cheaper source of capital than equity. Since large-caps are seen as safer than their smaller constituents, they tend to enjoy lower cost of capital. We can put the sustainability of PPL’s debt levels to the test by looking at how well interest payments are covered by earnings. Ideally, earnings before interest and tax (EBIT) should cover net interest by at least three times. In PPL’s case, the ratio of 5.49x suggests that interest is appropriately covered. Large-cap investments like PPL are often believed to be a safe investment due to their ability to pump out ample earnings multiple times its interest payments.

Next Steps:

PPL’s debt and cash flow levels indicate room for improvement. Its cash flow coverage of less than a quarter of debt means that operating efficiency could be an issue. In addition to this, its lack of liquidity raises questions over current asset management practices for the large-cap. I admit this is a fairly basic analysis for PPL’s financial health. Other important fundamentals need to be considered alongside. I suggest you continue to research Pembina Pipeline to get a more holistic view of the stock by looking at:

  1. Future Outlook: What are well-informed industry analysts predicting for PPL’s future growth? Take a look at our free research report of analyst consensus for PPL’s outlook.
  2. Valuation: What is PPL worth today? Is the stock undervalued, even when its growth outlook is factored into its intrinsic value? The intrinsic value infographic in our free research report helps visualize whether PPL is currently mispriced by the market.
  3. Other High-Performing Stocks: Are there other stocks that provide better prospects with proven track records? Explore our free list of these great stocks here.

To help readers see pass the short term volatility of the financial market, we aim to bring you a long-term focused research analysis purely driven by fundamental data. Note that our analysis does not factor in the latest price sensitive company announcements.

The author is an independent contributor and at the time of publication had no position in the stocks mentioned.