Pembina Pipeline's (NYSE: PBA) most recent quarterly results were pretty much in line with what we have seen in the most recent quarters: small but steady increases in revenue and operating profits, but modest declines in net earnings as the company issues equity and debt. According to management, though, these are going to change pretty fast.
Let's dig into Pembina's most recent quarterly results to see how the company closed out 2016 and take a look at what 2017 has in store.
By the numbers
|Results*||Q4 2016||Q3 2016||Q4 2015|
|Earnings per share||$0.28||$0.25||$0.32|
*IN MILLIONS, EXCEPT PER-SHARE DATA. RESULTS IN CANADIAN DOLLARS. DATA SOURCE: PEMBINA PIPELINE CORPORATION EARNINGS RELEASE.
According to management, the fourth quarter was one of the best in the company's history with some of its best operational profits ever. Looking at the results, however, it seems like that is a bit of an overstatement. Sure, operating margins were much higher than we have seen in prior quarters, but that isn't flowing down to the bottom line. In the fourth quarter, total interest expenses and finance costs increased 72% to CA$38 million, and financing expenses for all of 2016 were CA$153 million, more than double 2015. It's also worth noting that total shares outstanding in the fourth quarter were 10% more than this time last year. Add these two factors together and you get lower net income and per share in the same quarter as record operational profits.
That may not sound great on the surface, but there is a justifiable explanation. Pembina just happens to be in the middle of a massive capital spending program where much of it is going to be put into service in the second half of 2017. In 2016, the company CA$1.7 billion in new assets into service that led to this years gains. In 2017, though, it expects to bring CA$4 billion in projects on line, with the bulk of that spending related to the phase 3 expansion of its natural gas liquid (NGL) long-haul pipelines that deliver Montney and and Deep Basin shale oil and gas to demand hubs in Edmonton.
Management expects that bringing all of these assets on line this year will lead to a CA$600 million to CA$950 million boost to annual EBITDA by 2018. For the amount of debt and equity the company has added, this seems like more than a fair trade-off.
From an operations standpoint, investor focus should be on the progress of all these construction projects. At the end of the fourth quarter, the phase 3 mainline expansion is 60% complete and expects top be ready mid-2017. The second largest project, its Redwater NGL fractionator, is now 90% complete. It will not be fully complete until the third quarter as it will take some time to go through the testing and commission phase.
These two projects are clearly the most important ones for Pembina today, but there are another half dozen or so projects that are also progressing along well. The current suite of projects currently under construction should all be complete by early 2018. Pembina expects to spend CA$1.88 billion in 2017 to complete all of these projects.
Beyond that, things are looking a little dry. On Feb. 16, the company announced a 20-years infrastructure development program with Chevron. While the press release says that it is a multibillion-dollar investment opportunity, no specific numbers were given for the project. Investors should watch in the coming quarter to see if more details on this project -- namely, a dollar amount.
What management had to say
As CEO Mick Dilger said about the company's performance in the prior year and his expectations for the coming year:
I'm very excited for what's sure to be a transformational 2017. We are about to bring into service the largest suite of growth projects in our history. Completion of these projects, along with approximately [CA]$1.7 billion of major projects we brought into service throughout 2016, including our Kakwa River facility acquisition, lends confidence in our ability to continue generating long-term and sustainable returns for our shareholders. As we focus on on-time and on-budget delivery of our existing capital program, we are also positioning our company for future opportunities as evidenced by our recent announcement of our Duvernay infrastructure development and service agreement.
What a Fool believes
Barring any unforeseen issues with Pembina's suite of projects, 2017 is shaping up to be a big year for the company. Some investors may be a little upset to see net income and EPS results decline in what is supposed to be a banner quarter, but you do need to keep in mind that this is leading up to a huge wave of cash generating assets slated to come on line this year.
Pembina stock may look expensive today with a total enterprise value to EBITDA of 20.3 times. If management can deliver on those EBITDA projections with all those projects coming on line, then shares will look cheap awfully fast.
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