Pembina Earnings: Northern Pipeline Outage and Weak Marketing Create Headwinds

Pembina’s PPL first-quarter earnings were somewhat challenging with the negative impacts of the Northern Pipeline outage and weak marketing spreads. Overall EBITDA fell 6% to CAD 947 million from last year’s levels. Despite the negative impacts of the North Pipeline outage (CAD 54 million) and marketing (a CAD 98 million decline from last year), Pembina reaffirmed its 2023 EBITDA midpoint of CAD 3.65 billion. Given this matches up well with our CAD 3.68 billion forecast, we expect to leave our CAD 41 and $30 fair value estimates and no moat rating unchanged.

The Northern Pipeline released natural gas liquids on Jan. 18, 2023, and service was only able to be resumed in late February at reduced pressures. Pembina has been able to transport about 70% of the liquids that would have been moved on the Northern Pipeline, mainly by using incremental volumes on the Peace system. The lost revenue and costs to return to service were CAD 54 million and expect to be another CAD 25 million - CAD 30 million during the second quarter.

While the Northern Pipeline costs were unexpected, the marketing declines were anticipated and reflected in our model. We would expect weaker marketing profits compared with a robust 2022 to persist for 2023. Reduced marketing volumes and weaker margins across propane, butane, and oil caused by lower prices had a negative impact. Aux Sable also had lower contributions because of the fall in natural gas liquids prices and recontracting efforts.

The Pembina Gas infrastructure transaction with KKR has had a limited impact on EBITDA thus far. Any positive impacts during the first quarter were offset by higher interest expenses, taxes, and depreciation. We remain somewhat skeptical about the ongoing financial benefits of this deal.