Lower Commodity Prices Drag on Pembina Outlook

The Daley Note: December 27, 2022

Earlier this month, Pembina Pipeline (PBA) provided 2023 Adjusted EBITDA guidance between $3.5 - $3.8 billion, representing a $25 million decrease from the midpoint of 2022 guidance ($3.625 - 3.725 billion). East Daley had forecasted $3.78 billion in Adj. EBITDA prior to the update for the Canadian midstream company.

Although PBA expects volumes across its assets to grow and inflationary pressures to provide uplift to its tariffs, lower NGL and crude prices as well as narrower spreads will negatively impact profitability for its Marketing & New Ventures businesses, the company said.

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Based on data from East Daley’s PBA Blueprint Financial Model, we estimate ~16% of the company’s 2022 EBITDA is exposed to commodity prices. According to PBA’s press release, it has hedged ~50% of 2023 fractionation exposure at C$45/bbl, limiting some of its exposure. But prices for NGL products have since continued to decline, resulting in further risk to unhedged volumes.

Per our NGL outlook from our 2023 Dirty Little Secrets report, East Daley expects NGL prices to see further downward pressure based on increasing inventories, potential recessionary pressures and lack of demand, as well as a tight fractionation capacity along the US Gulf Coast.

On a more positive note, PBA updated on new business developments, including the reactivation of the Nipisi Pipeline and a possible Redwater Frac 4, a 55 Mb/d propane+ fractionator that would be located in PBA’s Redwater complex northeast of Edmonton, AB. However, neither announcement is likely to materially contribute to 2023 EBITDA.

Additionally, PBA announced the sale of its 50% interest in the KAPS pipeline system to Stonepeak for $662.5 million. Proceeds from the sale will be used to repay credit facilities associated with KAPS construction. – AJ O’ Donnell Tickers: PBA.