Pembina Pipeline Corp.'s Earnings and Development Plans Remain on Track

By Markets Fool.com

When a company has expansion plans as ambitious as Pembina Pipeline Corp.'s(NYSE: PBA), it can sometimes impact operational performance because so much attention is given to development. Finding that balance can be tough. Based on Pembina's most recent earnings report, though, that doesn't appear to be too much of a concern.

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Here's a quick look at the company's most recent earnings results, an update on its development plans, and what investors should be watching for in the coming quarters.

Image source: Getty Images.

By the numbers

Results* Q3 2016 Q2 2016 Q3 2015
Revenue $970 $1,027 $1,026
Operating margin $317 $327 $271
Net Income $120 $113 $113
Earnings per share

$0.25

$0.25 $0.29

*in millions, except per-share data. Results also expressed in Canadian dollars. Data source: Pembina Pipeline Corporation earnings release.

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When it comes to pipeline companies like Pembina, revenue typically isn't a good metric to look at to gauge the success or failure of a quarter. That's because most companies in this industry book revenue based on commodity prices, but so too are the cost of goods. Because of this, it is always better to look at things like gross or operating margins for these companies because they give a more accurate reflection of the quarter's results.

In this case, Pembina's results remained rather solid. Pipeline volumes and service revenue increased across the board compared to this time last year, which resulted in increasing operating margins and net income. The reason for the per-share earnings decline was from a higher share count. As Pembina completes more of its projects, though, it should help to offset the per-share dilution.

At the end of the third quarter, Pembina had a total debt load of $3.8 million, which is mostly a reflection of its recent $500 million debt issuance that was used to help fund its development portfolio. Even after this debt issuance, Pembina's balance sheet looks rather solid with a debt-to-capital ratio of 28% and a net debt-to-EBITDA multiple of 3.5 times.

The highlights

From an operational standpoint, the quarter was pretty quiet. A few new projects came on line and we saw modest upticks across the board. In the big picture, it's important that the company continues to operate these assets in a cost effective manner. Over the next couple years, though, the big priority is its suite of expansion projects.

While Pembina has a lot of irons in the fire in terms of expansion projects, but the most important one is by far its phase 3 pipeline expansions. This represents $2.4 billion of the company's $5.4 billion in capital committed to new projects. At the end of the quarter, this project was 50% complete and is expected to be completed on time in mid-2017.

As for the rest of the companies' capital projects, they too appear to be on track. Its second-largest project on the books, its $400 million third natural gas liquids fractionator, is now 75% complete and will come on stream in the third quarter of 2017.

What management had to say

Since so much of Pembina's expansion work remains on track and is expected to come on line in 2017, CFO Scott Burrows wanted to give some guidance as to what all those projects will mean for Pembina's bottom line. Based on his statement, investors should be very excited about the future:

2017 is setting up to be an exciting year as we will enjoy a full year contribution from large-scale assets such as RFS II, Kakwa River, Musreau III, the Horizon Expansion, among others. We are enthusiastic about the growth we'll be bringing on stream over the next 12 months.

Inclusive of the projects put into service this year, we have clear line of sight to adding $600 million to $950 million of EBITDA by 2018, providing visibility to near-term dividend and cash flow per share growth. As always, we will continue to focus on operating and growing our business in a safe, reliable and cost-effective manner.

What a Fool believes

Pembina Pipeline's earnings were a bit of a mixed bag. The company missed analyst expectations, but modest gains across the board suggest that investors probably shouldn't pay too much attention to that. Pembina continued to deliver on its development projects that will provide a large bump to earnings over the next coming years without putting its balance sheet in trouble. As long as Pembina can stay the course, then investors should expect strong gains in the coming years.

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