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Pembina has long touted its dividend-paying capabilities, yet its shares have yet to rebound to their pre-COVID levels after tumbling by more than half in early 2020 when energy prices cratered.

Pembina Pipeline Corp. PPL-T is forming a joint venture with U.S. private equity firm KKR & Co. Inc. KKR-C-N that will combine their natural gas processing assets in Western Canada, while boosting Pembina’s monthly dividend by 3.6 per cent in the process.

The new venture will be owned 60 per cent by Pembina and 40 per cent by KKR’s global infrastructure funds, and also incorporate some assets from Energy Transfer Canada. Pembina will oversee its operations.

All told, the new company will house 25 gas processing facilities that provide roughly five billion cubic feet per day of capacity in the Montney and Duvernay formations of northeast British Columbia and central Alberta, respectively.

The transaction is a complex one, but overall it reduces Pembina’s exposure to gas and processing assets, “which we view as less of a focus for the company versus its pipeline and natural gas liquids infrastructure assets,” Scotia Capital analyst Robert Hope wrote in a note to clients.

With Calgary-based Pembina receiving $700-million in cash through the combination, “the transaction in essence monetizes a portion of Pembina’s gathering and processing assets,” he wrote.

Pembina and KKR already have a business relationship as co-owners of another gas processing and transportation company, Veresen Midstream, of which KKR owns 55 per cent and Pembina owns the remaining 45-per-cent stake. The head of this business, Chris Rousch, will run the new joint venture.

As a midstream oil and gas company that focuses on pipelines and processing facilities, Pembina has long touted its dividend-paying capabilities, yet its shares have yet to rebound to their pre-COVID levels after tumbling by more than half in early 2020 when energy prices cratered. Before the deal was announced Tuesday, its stock offered a dividend yield of 5.8 per cent.

The joint venture news, combined with a modest dividend hike, helped Pembina’s shares close 2.3 per cent higher on Tuesday at $44.08 apiece.

Of the $700-million Pembina expects to receive through the transaction, $550-million will be used for debt repayment and $150-million will be put toward share repurchases that will help to boost its earnings per share.

Through the complex combination, Pembina will get more exposure to Veresen Midstream, something chief executive officer Scott Burrows touted as one of the deal’s main benefits. Veresen Midstream is skewed toward northeast B.C., and the Montney formation in this region has a vast amount of quality natural gas that Canada is looking to export through liquefied natural gas shipments.

On a conference call with investors Mr. Burrows also touted the $4.6-billion in combined tax pools the joint venture will have at its use, which should allow it to skirt paying taxes for the next three to four years.

As part of the deal, Energy Transfer LP is selling its 51 per cent stake in Energy Transfer Canada to the joint venture, valuing the stake at $1.3-billion, including debt and preferred equity. By doing so, the U.S.-based Energy Transfer is divesting its Canadian assets to pay down debt.

Interim Pembina Pipeline CEO Scott Burrows to lead company on a permanent basis

Pembina CEO Mick Dilger steps down unexpectedly

Pembina has seen a lot of change over the past year. In June, 2021, the company emerged as a white knight to counter Brookfield Infrastructure LP’s hostile takeover bid for Inter Pipeline Corp., but was ultimately unsuccessful after Brookfield boosted its takeover price. Five months later, in November, CEO Mick Dilger, who oversaw the white knight bid, stepped down.

Last week Pembina formally named long-time chief financial officer Mr. Burrows as its new CEO.

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