Stock Smarts: Pembina-Veresen a Win-Win
Two of the companies recommended in my Income Investor newsletter companies are joining forces in a deal that will create one of Canada’s largest energy processing, storage, and transportation firms.
Pembina Pipelines Ltd. (TSX: PPL, NYSE: PBA) is buying all the assets of Veresen Inc. (TSX: VSN) in a friendly deal valued at $9.7 billion, including the assumption of Veresen’s debt. The transaction is expected to close in the second half of this year.
We first recommended Pembina in June 2009 at $14.77. Veresen was picked in October 2016 at $13.29.
Under the terms of the deal, Veresen shareholders will receive $18.65 in cash for each share they own, or they can convert to Pembina shares at a rate of 0.4287 for each Veresen share. (There is a complex pro-rata formula that will be applied if the cash redemptions exceed $1.523 billion; see the Pembina website for details).
This appears to be a win-win deal for everyone involved. Veresen shareholders saw the stock price jump $2.90 (about 19 per cent) on the day after the deal was announced.
Pembina’s price fell 3.3 per cent after the deal was revealed but has since recovered that loss.
Many pluses, few minuses
The combined company has a lot of pluses and very few minuses going for it.
There is very little overlap in their operations. Veresen is engaged in three principal businesses: pipeline transportation that includes interests in the Alliance Pipeline, the Ruby Pipeline and the Alberta Ethane Gathering System; a midstream business which includes a partnership interest in Veresen Midstream Limited Partnership, which owns assets in western Canada; and an ownership interest in Aux Sable, which owns a world-class natural gas liquids (NGL) extraction facility near Chicago and other natural gas and NGL processing energy infrastructure.
Pembina owns and operates an integrated system of pipelines that transport various products derived from natural gas and hydrocarbon liquids produced primarily in western Canada. The company also owns and operates gas gathering and processing facilities and an oil and natural gas liquids infrastructure and logistics business.
What really excites analysts is the strong position the combined company will have in serving the Montney and Duverney regions in Alberta and B.C., which are still in the early stages of development. According to a 2016 report, the Duvernay Formation holds proved plus probable reserves of 395 million barrels of oil equivalent (boe), most of it in the form of natural gas.
What to do now?
Pembina shareholders should hold their positions and add to them on any weakness. The merged company looks like a very attractive long-term investment, with dividends expected to steadily increase.
Veresen investors have a decision to make, as follows.
Sell now. Depending on when you bought, you should exit with a significant capital gain. This will be taxable in non-registered accounts.
Take cash at closing. If you take the cash offer of $18.65 a share, you will avoid paying a sales commission. You will also receive monthly dividends of $0.0833 per share until the closing date.
Exchange shares for Pembina stock. This would be my preferred option. I like the prospects for the combined company going forward and I believe it will continue to reward shareholders with steady dividend increases and respectable capital gains.
Discuss these options with your financial advisor before acting.