BMO Capital spots buy chance in Cdn. midstream stocks

On Friday, BMO Capital Markets highlighted an opportunity in Canadian midstream stocks following a recent decline in oil prices. Analyst Ben Pham from BMO Capital pointed out that the dip in prices could serve as a strategic entry point for investors, especially given the sector's defensive characteristics and historical patterns of recovery after downturns.

Canadian midstream stocks have experienced a downturn, with the sub-sector falling 10.7% from its early April highs, a more significant drop than the S&P/TSX Composite Index, which is down 6.9% year-to-date. Valuations have also compressed to around 10 times forward EBITDA. Pham noted that while volatility is expected to persist, particularly if oil prices continue to fall, such periods have historically presented buying opportunities.

The analyst emphasized the defensive nature of the sector, which is supported by assets that are largely regulated or contracted, making companies like Enbridge Inc. (NYSE:ENB) and TC Energy Corp. (NYSE:TRP), both rated as Market Perform (Mkt), less vulnerable to market fluctuations. For investors seeking a more defensive stance, these companies could be a preferable option. InvestingPro data supports this defensive positioning, showing Pembina Pipeline maintains a "GOOD" overall financial health score and has maintained dividend payments for 21 consecutive years, with a current yield of 5.45%.

Pham further explained that during oil price downturns, the market often overreacts, leading to compressed marketing margins, reduced volumes on non-contracted assets, and emerging counterparty risk on contracted assets. However, he also pointed out that the correlation between midstream stocks and oil prices is limited in the long term. When oil is priced between $50-60 per barrel, the sector's enterprise value to EBITDA ratio tends to find support around the current levels, with additional downside if oil falls below $40 per barrel.

The preferred Canadian midstream stocks identified by BMO Capital for potential increased investment positions are AltaGas Ltd . (TSX:ALA), Gibson Energy Inc . (TSX:GEI), and Pembina Pipeline Corp (NYSE:PBA). (PPL (NYSE:PPL)), all rated as Outperform (OP). These recommendations come as Pham believes that attractive buying opportunities are likely to materialize for long-term investors once the current volatility settles. InvestingPro analysis reveals Pembina's strong fundamentals, with a market cap of $20.65 billion and 16.63% revenue growth in the last twelve months. InvestingPro subscribers have access to 8 additional exclusive ProTips and a comprehensive Pro Research Report that provides deep insights into Pembina's valuation and growth prospects.

In other recent news, Pembina Pipeline Corp. received an upgrade in its stock rating from Citi, moving from Neutral to Buy, with a new price target set at C$63.00. This upgrade follows the company's recent underperformance, with Citi analysts highlighting the Greenlight power project as a significant growth catalyst. The project is expected to contribute over 20% to Pembina's EBITDA growth, with additional positive developments anticipated in 2025, including the resolution of the Alliance pipeline toll review and the announcement of the ethane supply plan for the Dow ethane cracker.

In a separate development, TD Cowen initiated coverage on Pembina Pipeline, also assigning a Buy rating with a price target of Cdn$66.00. Analysts at TD Cowen expressed strong conviction in the company's valuation and growth prospects, noting Pembina's competitive asset portfolio and robust growth opportunity pipeline. Stifel analysts further supported this view by identifying Pembina as their top selection, citing the stock as undervalued.

These developments underscore a positive outlook for Pembina Pipeline, with both Citi and TD Cowen highlighting the company's potential for future growth. The strategic moves and project developments highlighted by these firms suggest that Pembina Pipeline's stock may present an attractive opportunity for investors.

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