Pembina Pipeline: Not a Buy Yet, But Still Worth Holding

Pembina Pipeline Corporation PBA is a prominent midstream energy company operating across North America. Its main business revolves around moving, storing and processing oil, natural gas and natural gas liquids. With a broad network of infrastructure assets, including pipelines, gathering systems and processing facilities, Pembina plays a vital part in transporting energy from production areas to where it is needed. This extensive footprint, combined with diversified services, gives the company a strong position in the energy value chain and supports steady earnings and potential growth.

For investors, it is important to focus on more than just share price trends. Pembina’s long-term value lies in its operational efficiency, strategic mergers and acquisitions, and ability to adapt to both regulatory and market fluctuations. Areas to watch closely include how efficiently PBA uses capital, how well manages costs and the capacity of the pipeline systems, especially its connection to major routes like the Trans Mountain Expansion, which is key for heavy oil transportation.

Although its stock has lagged behind some competitors, Pembina’s solid financial base and infrastructure exposure suggest there may be upside as the industry recovers. As a major player in the energy logistics space, Pembina naturally attracts investor interest. But what are the real drivers behind its current position and what potential obstacles could slow progress?

Let us break down the main forces that could influence its future, highlighting both growth catalysts and possible challenges.

Why Pembina’s Long-Term Fundamentals Still Point to Upside

Strong and Diversified Integrated Value Chain: PBA differentiates itself as the only Canadian energy infrastructure company with a fully integrated value chain that services all major commodities: natural gas, NGLs (ethane, propane, butane), condensate and crude oil. This comprehensive scope and scale, combined with access to premium North American and global markets, uniquely position the company to capture incremental volumes from the growing Western Canadian Sedimentary Basin (“WCSB”).

Unlike Kinder Morgan KMI and Enbridge ENB, whose assets are largely more specialized or U.S.-centric, Pembina’s integrated model provides resilience, as weakness in one commodity can be offset by strength in another. This “one-stop-shop” approach creates a significant competitive moat, particularly in Western Canada, where Plains Group PAGP has a more targeted focus on crude and NGL logistics but lacks the same level of integration.

Visible and Disciplined Growth Project Pipeline: The company is actively advancing more than C$1 billion in conventional pipeline expansions, such as the Taylor-to-Gordondale project and the Fox Creek-to-Namao expansion, all secured by long-term, take-or-pay contracts. These projects are demand-driven and designed to reliably meet rising transportation needs from growing WCSB production. Furthermore, the Cedar LNG project is on budget and on schedule for late 2028, representing a major future EBITDA contributor. This visible growth pipeline, underpinned by firm customer commitments, provides clear visibility into cash flow growth.

Robust and Growing Propane Export Strategy: PBA is significantly enhancing its propane export capabilities to capitalize on strong demand from Asia. Through a C$145 million optimization of its Prince Rupert Terminal to accommodate larger Medium Gas Carrier vessels and a new tolling agreement with AltaGas for 30,000 bpd of capacity, the company will soon have access to 50,000 bpd of highly competitive export capacity. This proactive expansion stands in contrast to Plains Group, which remains largely focused on U.S. crude export infrastructure, and Kinder Morgan, whose Gulf Coast terminals serve different commodity mixes. Pembina's strategic focus on Asian propane markets gives it a differentiated growth vector compared with peers, which have less exposure to international LPG markets.

Strong Contracted Revenue Base With Long Durations: The company's financial foundation is secured by a strong base of long-term, take-or-pay contracts. On its key Peace and Northern pipeline systems, PBA has approximately 1 million barrels per day of firm contracted volumes with a weighted average contract life of seven and a half years. PBA’s management highlighted that this duration has remained consistent and even increased slightly over the past two years due to successful efforts to "blend and extend" existing contracts and sign new incremental long-term agreements, ensuring predictable and stable cash flows.

Successful Partnership Model and Gas Infrastructure Growth:The Pembina Gas Infrastructure (“PGI”) joint venture with KKR has been a tremendous success, continuously acquiring new assets and securing long-term dedications. Recent tuck-in acquisitions, like the remaining interest in the Duvernay assets from Whitecap and the funding of the North Gold Creek battery, enhance its footprint and are backed by new take-or-pay commitments. PGI focuses on high-quality, liquids-rich resources, feeding volumes into Pembina's broader pipeline and fractionation network, creating a powerful and synergistic growth engine.

Key Risks That Could Impact Pembina’s Growth Trajectory

Potential for Margin Compression Amid Competition: While Pembina boasts a cost-advantaged position, the intense competitive environment creates persistent pressure on the margins it can earn on the services. As competitors build new infrastructure and producers negotiate aggressively, there is a risk that the favorable margin component of Pembina's historical growth could diminish. The company must continuously rely on operational excellence and cost savings to maintain its competitive tolls, as pure volume growth alone may not be sufficient to drive significant EBITDA expansion if margins contract.

Dependence on Broader WCSB Growth and Producer Health: PBA's growth thesis is heavily dependent on continued volume growth from the Western Canadian Sedimentary Basin. A significant slowdown in producer drilling activity, due to prolonged low commodity prices, a lack of new egress or more stringent environmental regulations, could stifle the very volume growth that Pembina's expansion projects are designed to handle. The company's fortunes are intrinsically linked to the health and investment appetite of its producer customers.

Major Capital Expenditures Outpacing Near-Term Free Cash Flow: The company increased its 2025 capital investment program by C$200 million to C$1.3 billion, aiming to fund new growth projects and acquisitions. Management indicated that 2025 is expected to generate only a "modest amount" of free cash flow and 2026 could see a "modest deficit" due to the significant capital outlays for the Cedar LNG project. This multi-year period of elevated capex, which pressures free cash flow, limits financial flexibility and may delay more aggressive returns of capital to its shareholders, such as substantial share buybacks.

Significant Exposure to Commodity Price Volatility in Marketing Segment: A substantial portion of Pembina's business, specifically the Marketing & New Ventures division, is exposed to commodity price swings. In the second quarter, adjusted EBITDA in this segment fell 48% year over year to C$74 million due to lower NGL margins resulting from decreased propane and butane prices, higher input natural gas costs and declining realized gains on derivatives. This volatility makes earnings less predictable quarter-to-quarter compared with pure fee-based pipeline income and introduces an element of risk to overall financial performance.

Recent Stock Performance Concerns: Over the past year, PBA has notably underperformed both its industry peers and broader oil-energy benchmarks. The stock declined 6.3%, while most of its competitors and market segments posted gains during the same period. Kinder Morgan delivered a strong return of 25.1% and Enbridge followed closely with a 20.3% gain. Even Plains Group, which had relatively modest performance, managed a slight increase of 0.5%. The Oil & Gas Production and Pipeline sub-industry (ZSI135M) rose 18.1% and the overall oil-energy sector (ZS12M) inched up 1.6%. When viewed alongside these benchmarks, Pembina’s negative return stands out as a significant lag, raising concerns about its relative performance and competitiveness in the energy infrastructure space.

12-Month Stock Performance Overview

Final Assessment of PBA’s Investment Case

PBA benefits from a uniquely integrated value chain across all major commodities, a robust pipeline of growth projects supported by long-term contracts, and a rapidly expanding propane export strategy aimed at higher-margin Asian markets. Pembina’s revenues are underpinned by a stable base of long-duration, take-or-pay agreements and the success of its PGI joint venture continues to enhance the asset base and growth prospects.

However, the company faces potential margin compression due to rising competition, significant capital expenditures that may pressure near-term free cash flow, and earnings volatility from commodity exposure in its Marketing segment. Additionally, Pembina’s growth is heavily reliant on sustained production from the Western Canadian Sedimentary Basin and its recent stock performance has lagged industry peers.

Given this mix of strengths and potential challenges, investors should wait for a more opportune entry point instead of adding this Zacks Rank #3 (Hold) stock to their portfolios. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

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This article originally published on Zacks Investment Research (zacks.com).

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