Analyst Note| Stephen Ellis |
We are downgrading Pembina’s moat to none from narrow. We think it has largely grown via acquisition and paid too much for the acquired assets. A material part of the justification and premium for the recent deals was future potential projects, specifically high-profile petrochemicals and LNG efforts totaling about CAD 9 billion-CAD 10 billion in capital, have since been shelved due to poor commercial potential. As a result, Pembina has returns on invested capital that are below its cost of capital considering its bloated asset base and associated goodwill. For similar reasons (overpayment for acquisitions and a continued propensity to do so), we've also downgraded our capital allocation rating to poor from standard.