Pembina Pipeline

Pembina posted adjusted EBITDA of 1.06 CAD, in line with the PitchBook consensus. This was the first report since Greenlight Electricity Centre was sanctioned and a partnership with West Coast Pipeline was announced.

Why it matters: The sanctioning of Greenlight is a substantial tailwind to the business, even if it takes the remainder of the decade to stand up. If Pembina can leverage this project to win new data center deals at similar terms, Pembina can deploy billions in capital at attractive rates of return. It would also benefit its upstream customers, who will have a way to dispose of gas even if pipelines back up or export demand is weak. Management sounded upbeat on a phase 2 expansion, saying there was momentum and commercial interest behind it.

The bottom line: We are increasing our fair value to CAD 66 and USD 47 from CAD 58 and USD 42, following an update to our outlook. The major driver was Greenlight, but we also added the Heartland Extraction plant. Shares look fairly valued after the increase, trading in 3-star territory. Our Morningstar Economic Moat Rating of none, Medium Uncertainty, and Standard Capital Allocation ratings are unchanged.

Long view: The West Coast Pipeline has political and regulatory momentum, but it remains clouded by uncertainty. Shippers on Trans Mountain were surprised by rates after cost overruns. That may prevent commercial momentum. Pembina itself was careful to stress that its 10% stake in the project does not represent any capital commitments yet and can still exit the project prior to the pipeline being sanctioned. If the pipeline moves forward, the real benefit is to Pembina's NGL franchise, which will need to grow to serve increasing demand for condensate from oil producers.

We are increasing our fair value estimate to USD 47 from USD 42 after incorporating the Greenlight Electricity Centre project. It will contribute roughly CAD 300 million in EBITDA under a 20-year tolling agreement and provide new demand for natural gas. Our US dollar fair value estimate uses a 1.40 conversion of our Canadian dollar fair value estimate.

Uncertainty about the macroeconomic environment may delay announcements of new projects as Canadian producers review their capital plans. The sector’s reliance on take-or-pay contracts with midstream partners like Pembina provides an incentive to maintain production, but not grow it beyond their obligations. Still, there are some possible green shoots. With China turning away from US crude oil, purchases of Canadian crude have eclipsed US purchases in 2025. Continued brittleness in relations may incentivize further investment in projects like the Trans Mountain pipeline. Pembina is advancing expansions of the Peace River system in response to increased customer demand.

Fundamentally, Pembina's earnings are driven by two levers: volume and pricing. The majority of existing volumes and pricing are protected by strong take-or-pay agreements, producing a low-volatility business. Further growth comes from new projects entering service. These have similarly strong contracts. Together, the existing portfolio can support a higher dividend, with low-single-digit growth and new projects boosting the business overall through higher volumes.

We assign Pembina a no-moat Morningstar Economic Moat Rating, but see a path to upgrading our assessment. Historically, the firm has struggled to consistently beat its cost of capital, due to poor investment decisions that have dragged down returns. The firm has grown through poorly timed acquisitions, which have inflated its capital base. We see the potential for consistent excess returns, but any improvement largely depends on successful organic rather than inorganic investment.

Areas of operation are subject to major stakeholder risk as pipelines crisscross First Nation land and sensitive wildlife areas. This adds complexity and can delay or kill projects. Cedar LNG is a joint venture with the Haisla Nation, helping to defuse potential stakeholder opposition. This represents an important shift, making our moat decision a close call. Ultimately, we erred on the side of caution because leadership has remained unchanged since the write-downs, but if current plans are executed successfully, we would likely upgrade our assessment.

The firm generates revenue through three types of arrangements. Take-or-pay agreements require the customer to either deliver commodities to the pipeline or pay a minimum fee. Contracted capacity not utilized can be resold, generally at a premium, as a pipeline is the lowest-cost method of transmission. Similarly, cost-of-service requires the customer to pay for transport and delivery, with an additional fee determined by the return on invested capital. Fee-for-service is generally a series of charges, including volume and capacity reservation fees, that commit a customer to deliver a minimum quantity of product. Finally, commodity-exposed revenue is generated by buying products from producers on a one-time or short-term basis, then leveraging spare capacity in the network to deliver them to a location where they can be sold for more.

The pipelines segment earns a narrow moat.

Revenue is largely secured with take-or-pay or cost-of-service agreements with customers. Compared with fee-for-service, in which the producer can decide whether to use the pipeline, these contracts are not volume-sensitive, as the producer is obligated to pay a fee regardless of whether they use the capacity.

Given Canada’s export-oriented oil and gas sector, volume growth is almost entirely dependent on new midstream capacity linking the landlocked fields in Alberta and British Columbia to consumers in the US or coastal export terminals on the Canadian west coast. For midstream firms, this is a great dynamic if the market is growing. To increase production, a producer bids up unallocated midstream capacity to displace another party or enters into a long-term agreement with a new pipeline. There are alternatives to pipelines, such as rail, but they have capacity and commodity limitations and are more expensive.

Pembina has also become the lone private partner in a proposed West Coast oil pipeline connecting the core of Alberta to Vancouver. The project could become lucrative for the firm, and boost the segment’s ROICs. However, it also represents the type of projects that historically dragged down returns. A heavy oil pipeline, crossing environmentally and politically sensitive jurisdictions, that is also likely to blow past initial cost estimates should give investors pause. Luckily, the remaining 90% stake is held by the government, which will also be loaning funds to indigenous tribes for the purpose of buying into the project. This should lower the ultimate risks but does not eliminate them as the project will likely be developed over a decade. Governments and public opinion can shift several times over that time.

The facilities segment, which processes the natural gas and NGL product streams, is unlikely to justify a moat as structured. The segment contains substantial field level gathering and processing operations, and we do not assign a moat to gathering and processing operations due to the generally shorter contract term and constant reinvestment needs. However, the fee structure underpinning the segment gives us pause in our moat evaluation.

Fees tend to be fixed and subject to regular increases, limiting exposure to commodity prices but not volume. Additionally, some contracts are determined by a set percentage return on invested capital, but these are in the minority. Fees reset on contract expiration, as initial contract rates tend to be higher to recoup investment costs. If competitors have invested aggressively in the same footprint over that time, then rates could reset lower.

Marketing and new ventures earn no moat.

Spare capacity in the other segments is sold on a one-time or short-term basis. This segment can see wide swings in performance as the spare capacity and the type and pricing of the commodities being marketed can vary greatly. As this is the segment’s primary activity, we assign it a no-moat rating.

In the future, the segment will also include a minority interest in Cedar LNG, expected to be completed at the end of 2028, and the Greenlight Electricity Centre. Both are tied to national and provincial strategic economic development priorities. Further expansions at both facilities are likely, with a second phase of the GEC already being contemplated.

These activities are far more moaty than marketing and could credibly result in a segmentwide and companywide upgrade.

Strong take-or-pay contracts provide a low-volatility baseline to support investment and dividends.

Vertically integrated NGL fractionation and export capacity provides a powerful reason for producers to sign up with the firm.

Cedar LNG successfully clearing regulatory hurdles and progressing to development will meaningfully boost EBITDA once online.

Take-or-pay provisions appear strong, but agreements eventually expire and are re-signed at market rates.

Canadian carbon taxes could make volumes less competitive and substantially hamper upstream investment.

A history of poorly timed investments has materially affected returns to shareholders. Further growth by acquisition risks repeating the same mistakes.