Midstream energy companies are widely-known to be a source of quality dividend income.
In many ways, midstream companies benefit from favorable economics. They benefit from the continued necessity of oil in the worldwide economy while being exposed to much less commodity price risk than their peers in the refining or exploration industries.
Pembina Pipeline Corporation (PBA) is one example of a midstream company rewarding its shareholders with high dividend income. This Canadian company – cross-listed on the Toronto Stock Exchange and the New York Stock Exchange – currently has a 4.7% dividend yield, more than twice the average yield of the S&P 500.
Pembina Pipeline’s common stock is unique among midstream oil companies because the companies dividends are paid monthly. For retirees or other investors that rely on their dividend income to cover expenses, this is highly superior to quarterly dividend payments.
Pembina Pipeline’s high dividend yield and monthly dividend payments make it an intriguing investment from an income perspective.
This article will analyze the investment prospects of Pembina Pipeline Corporation in detail.
Business Overview & Merger With Veresen
Pembina Pipeline Corporation is a Canadian pure-play energy infrastructure company based in Calgary, Alberta, Canada.
With a market capitalization of $17 billion at the time of this writing, Pembina is a member of the TSX 60 – the 60 largest companies in Canada by market capitalization.
Pembina is well-known among its investors for its phenomenal track record of delivering outsized total returns.
Pembina’s ten-year total return performance is compared to its benchmark – the S&P/TSX Energy Infrastructure Index – in the diagram below.
Source: Pembina Pipeline 2016 Investor Day Presentation, slide 16
On May 1, Pembina announced the intention to merge with Veresen (VSN) – another Canadian midstream company – to create a ‘leading North American energy infrastructure company’. In many ways, this is similar to the merger of Enbridge (ENB) and Spectra Energy (SE) earlier this year.
The transaction value is approximately $9.7 billion, including the assumption of debt. Here are some details of the transaction from the company’s press release:
“Pembina is offering to acquire all of the outstanding Veresen common shares in exchange for either (i) 0.4287 of a common share of Pembina or (ii) $18.65 in cash, subject to pro-ration based on maximum share consideration of approximately 99.5 million Pembina common shares and maximum cash consideration of approximately $1.523 billion. Assuming full pro-ration, each Veresen shareholder would receive $4.8494 in cash and 0.3172 of a common share of Pembina for each Veresen common share. This offer represents a 21.8 percent premium to Veresen’s 20 day weighted average price of $15.31 and a 22.5 percent premium to Veresen’s closing share price of $15.23 on April 28, 2017.”
Current Pembina shareholders are expected to own approximately 80% of the combined company and existing Veresen shareholders are expected to own the remaining ~20%. Investors should be pleased to hear that the executive management and board members of Veresen are electing to receive the all-stock proceeds of the transaction, if approved.
Details of how the combined company compares to the current Pembina and Veresen businesses can be seen below.
