Story Stocks^®

Pembina Pipeline (PBA), a Canadian energy pipeline, transportation and midstream services company, has been active in the M&A market and the company is making another significant move as it looks to bolster its natural gas infrastructure assets and capacity. The company's gas processing unit, Pembina Gas Infrastructure, which is jointly owned with private equity firm KKR & Co (KKR), has entered into an agreement with Veren Inc. to acquire four batteries from Veren in the Gold Creek and Karr areas of Alberta, Canada.

• PBA's purchase of these assets comes only a couple months after it announced a purchase and sale agreement with Whitecap Resources in which it acquired a 50% working interest in Whitecap's Kaybob Complex for $420 mln. While Whitecap retained operatorship of the assets, PBA will benefit from the 165 mln cubic feet per day of natural gas processing capacity at the Kaybob Complex due to the take-or-pay agreement it entered into with Whitecap for its portion of the capacity.
• Similarly, PBA's $400 mln transaction with Veren includes a 15-year take-or-pay arrangement and area of dedication agreements with Veren, which will retain operatorship responsibilities. In total, the four batteries that PBA acquired include natural gas handling capacity of 320 mln cubic feet per day and liquids handling capacity of 53,000 barrels per day.
• These deals will only bolster a Facilities segment for PBA that has already been producing strong results. In Q2, adjusted EBITDA in Facilities increased by 25% yr/yr to $340 mln, driven by momentum across the Canadian energy industry. Along with a 31% adjusted EBITDA increase in the Pipelines business, the healthy growth in Facilities enabled PBA to raise its FY24 adjusted EBITDA guidance to C$4.20-C$4.35 bln from C$4.05-C$4.30 bln.
• Upon the closing of this transaction, PBA estimates that the addition of these assets will contribute C$50 mln in annual adjusted EBITDA, while further capital deployment to the assets will generate incremental EBITDA due to corresponding fees and increased plant utilization.
• The only clear negative is that PBA intends to fund the acquisition with an existing credit facility, so it will be taking on more debt. However, there isn't too much concern here given that its balance sheet is in relatively good shape with a debt-to-adjusted EBITDA ratio of 3.6x -- at the low end of its targeted range.

 The main takeaway is that this looks like another solid, lower-risk deal for PBA that will enable it to further capitalize on rising natural gas production in North America.