TSX Commentary

Pembina Pipeline (PIF.UN) – $17.90 – Strategic Focus on Enhancing the Footprint
Outperform, Average Risk, Price Target: $18.50
RBC CM recently hosted investor meetings with Bob Michaleski (President and CEO) in New York and New Jersey. Management is focused on growing the company through a combination of greenfield/brownfield projects in addition to acquisitions. However, the focus of the growth initiatives is squarely on enhancing the liquids infrastructure business and, in particular, pipelines to serve the oil sands and projects to improve throughput on the conventional system. Pembina’s strategy for gas processing is one that includes improving throughput on its liquids pipeline system, while earning a strong return on the processing facility. With the recent Cutbank acquisition, Pembina could invest roughly $100 million in equipment to take a deep cut from the gas stream, which would produce roughly 10,000 to 12,000 bpd of NGLs that would be transported on the existing pipeline system (and generate additional toll revenue). The current guidance that the available UCC and tax losses will help sustain the distribution until 2013 assumes no growth initiatives. In all likelihood, RBC CM believes that Pembina will be successful in winning new projects and/or acquiring assets that will help sustain the distribution past 2013. The previously announced conversion to a corporate structure could occur as early as mid-year. Given the strategy of maintaining the distribution post-conversion, RBC CM does not expect a material impact on the unit price from the structural change. RBC CM’s $18.50 per unit price target (unchanged) is based on a roughly 11.5x multiple of 2011E EBITDA, which is above the group average, reflecting the high proportion of cash flow derived from the oil pipeline business.