A Calgary-based company is growing along with its network of oil pipelines in western Canada.
With TransCanada Corporation caught up in red tape as it tries to push through its nearly 2,000-kilometre cross-border Keystone Pipeline, Pembina Pipeline Corporation is expanding much closer to home and it’s paying off.
Pembina announced at the end of 2013 it had acquired enough support from potential customers to construct 540 kilometres of new pipeline from Taylor B.C., to Edmonton Alta. at a cost of $2 billion.
Since the end of November, the company’s stock has climbed more than $4 per share. It closed Friday at just over $38.
Finance expert William McNally, a professor at Wilfred Laurier University’s School of Business and Economics, said the timing of the two events doesn’t come as a surprise.
McNally said investors typically want to know what they’re buying into.
“People will be more optimistic if you say, ‘Hey look, we’re going to go increase this pipeline and that’s going to generate more business,’” he said.
“Clearly people thought it was worth a few dollars more after that announcement,” McNally said of Pembina.
“The idea behind stock prices is that they’re the present value of all future profits. So if we think that the company is going to be more profitable in the future, we’re willing to pay more for the stock,” he said.
Pembina more than doubled its revenue in 2012 from 2011. Pembina’s 2013 annual report is slated for release at the end of this month.
“If a company’s growing quickly, then we’ll probably think they’ll continue to grow quickly in the future,” McNally said.
But banking on something that hasn’t happened yet — like Pembina’s latest expansion, which isn’t expected to be completed until at least 2017 — is risky business.
“We’re talking about the future. No one knows for sure. Everybody’s guessing,” McNally said.
“The company knew that the market was receptive so they thought, ‘Okay, let’s raise some more money,’” McNally said.
He said the number shares a company makes available in an offering is flexible and ultimately depends on how high a price the company thinks they can sell the shares for.
“What we should see when all the dust settles is that they have a big pile of cash,” McNally said.
“Slowly, they’ll spend that as they start building this pipeline,” he said.
McNally said although there might not be much in the bank while the pipeline is being built, the investment is long-term as the new infrastructure will increase the company’s overall value.
Even if Pembina does put the $250 million toward the $2-billion expansion, McNally pointed out it will only cover a fraction of the cost.
He said he anticipates Pembina will likely have to do some borrowing to compensate and the company’s long-term debt will probably go up as well as the company funds the expansion.
But just how much likely won’t be clear until the company gets its 2014 first-quarter results later this spring.
Pembina’s 2012 Annual Report: