How Pembina pulled off a 500% return by keeping pipelines full and building trust with First Nations

How Pembina pulled off a 500% return by keeping pipelines full and building trust with First Nations

Claudia Cattaneo | March 14, 2014 6:00 PM ET
image001-14CALGARY • Mick Dilger, president and CEO of Pembina Pipeline Corp., is the first to acknowledge that owning pipelines in energy-friendly Alberta goes a long way to making aggressive expansion a welcome event.

Claudia Cattaneo: In recruiting Jim Prentice to help boost aboriginal support for the Northern Gateway pipeline, proponent Enbridge Inc. and its oil company partners have lined up one of the top guns in the business

Yet Canada’s third-largest pipeline company has played its hand so well that its stock has appreciated more than 25% in the past 12 months alone — the best performance among Canada’s pipeline players, including competitors Enbridge Inc. and TransCanada Corp. that are steeped in controversies over their growth projects outside Alberta.

Indeed, in the past decade, publicity-shy Pembina, founded 60 years ago by Alberta’s Mannix dynasty, pulled off a total return more in line with the high flyers in technology — more than 500%.

As the oil industry across the board struggles to build good relations with First Nations, Pembina’s dealings with the 50 to 100 aboriginal communities impacted by its assets have been so harmonious it hasn’t gone to a single hearing before provincial regulators in the past decade because it sorted out all concerns on its own; while others have been in the public eye over pipeline incidents, Pembina kept its operations out of trouble and running at full throttle.

“We try to keep the oil in the pipeline, that is a good start,” Mr. Dilger said in an interview. “We spend a lot of money on integrity, so we have a best-in-class integrity group. We treat people the way we want to be treated and we build up trust over a long period of time.”

Pembina, he said, regards its relations with aboriginals as a core part of its business and believes it does it better than anybody else.

The mix of corporate priorities has helped the company get the most out of the shale gas/tight oil revolution under way in Alberta and British Columbia. Pembina’s pipelines transport, for a fee, 50% of the conventional oil produced in Alberta, 30% of the natural gas liquids produced in Western Canada, and 30% of the heavy oil produced in Alberta’s oil sands. Overall, Pembina carries about 720,000 barrels a day of light oil and liquids, headed to 1.4 million b/d in 2017 with expansions under way. In addition, it has 880,000 b/d in contracted capacity its heavy oil and oil sands pipelines.

The Calgary-based company grew from a single pipeline to move oil from the Pembina oil discovery in Drayton Valley, one of Alberta’s oldest producing areas, to own a pipeline system that sits right on top of the hottest fields rejuvenated by hydraulic fracturing — the Montney, the Duvernay, the Deep Basin, the Cardium and the Swan Hills.

The legacy system is so well placed the company says it would re-build it in exactly the same place if it weren’t already there. Instead, it keeps expanding it and adding infrastructure nearby that offers valuable services to oil companies that want to focus on drilling.

“When I joined nine years ago, the pipelines as they sat were half full,” said Mr. Dilger, a 50-year old chartered accountant with deep experience in energy infrastructure who stepped into Pembina’s top job in January, replacing long-time president and CEO Bob Michaleski.

“They then filled, we expanded them, they filled, we expanded them, and now with these [additional] expansions, we expect they will fill. There has been a huge volume build in Western Canada.”

Pembina’s other assets include a series of gas processing plants that take liquids out of the gas stream, which are fed into its own pipelines. It also owns truck and rail terminals and storage facilities as well as a fractionator that further removes products from the gas stream.

The surge in both conventional and unconventional production in Western Canada has been so significant, and has so much room to grow as the new fields are better understood, Mr. Dilger said Pembina doesn’t need to expand outside its core geography.

With a market capitalization of about $13-billion, and an enterprise value of about $15-billion, Pembina has a further $4.5-billion in committed expansion projects under way — among them a $2-billion expansion of its Peace system that cuts through the northwestern part of Alberta — and another $2.5-billion in probable projects.

“We think that the Montney and the Duvernay are still in the early days of development,” Mr. Dilger said.

“Some people think the Duvernay could become like the Eagle Ford, and it went from zero to one million barrels a day in a very short time frame,” he said. “The Montney, some people think it’s the largest gas resource in the world. If they are both the case, we have a lot of running room.”

With existing infrastructure becoming valuable, the market is paying attention.

RBC Capital Markets’ Robert Kwan said in a recent note he is upbeat about Pembina’s growth projects and its integrated business model that “processes liquids in the field, transports them by pipeline and fractionates, stores and provides terminaling services” and has an “outperform” rating on the company.

Peters & Co. analysts Tyler Reardon and Jeff Martin, who rate Pembina a “sector perform,” said the company has “has done an exceptional job of capturing new growth projects and improving the integration of its asset base over the past few years, and this integration will only be strengthened as a number of new expansions are completed.”

The Mannix family, one of Western Canada’s wealthiest, sold the Pembina assets in 1997 through an initial public offering and the formation of the Pembina Pipeline Income Trust. With Ottawa abolishing income trusts, Pembina turned itself into a corporation in 2010. The Mannixes retain a small interest in the company.

Pembina continued to grow through acquisitions. Its latest purchase was in 2012 — it paid $3.2-billion for Provident Energy Ltd. to gain natural gas liquids extraction, storage and transportation services.

Mr. Dilger, whose energy career included stops at TransCanada and predecessor Nova Corp., said there are win-win solutions for pipeline plans challenged by aboriginal unrest and broader community worries about pipeline safety.

“I would encourage everybody to listen generously,” he said, and also to talk more about pipelines’ record as “the most safe, reliable way to transport these products by far.”

 

About bambooinnovator
Kee Koon Boon (“KB”) is the co-founder and director of HERO Investment Management which provides specialized fund management and investment advisory services to the ARCHEA Asia HERO Innovators Fund (www.heroinnovator.com), the only Asian SMID-cap tech-focused fund in the industry. KB is an internationally featured investor rooted in the principles of value investing for over a decade as a fund manager and analyst in the Asian capital markets who started his career at a boutique hedge fund in Singapore where he was with the firm since 2002 and was also part of the core investment committee in significantly outperforming the index in the 10-year-plus-old flagship Asian fund. He was also the portfolio manager for Asia-Pacific equities at Korea’s largest mutual fund company. Prior to setting up the H.E.R.O. Innovators Fund, KB was the Chief Investment Officer & CEO of a Singapore Registered Fund Management Company (RFMC) where he is responsible for listed Asian equity investments. KB had taught accounting at the Singapore Management University (SMU) as a faculty member and also pioneered the 15-week course on Accounting Fraud in Asia as an official module at SMU. KB remains grateful and honored to be invited by Singapore’s financial regulator Monetary Authority of Singapore (MAS) to present to their top management team about implementing a world’s first fact-based forward-looking fraud detection framework to bring about benefits for the capital markets in Singapore and for the public and investment community. KB also served the community in sharing his insights in writing articles about value investing and corporate governance in the media that include Business Times, Straits Times, Jakarta Post, Manual of Ideas, Investopedia, TedXWallStreet. He had also presented in top investment, banking and finance conferences in America, Italy, Sydney, Cape Town, HK, China. He has trained CEOs, entrepreneurs, CFOs, management executives in business strategy & business model innovation in Singapore, HK and China.

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