InterPipeline behind the competition

IPL - Inter PipelineInter Pipeline is an integrated energy infrastructure company in Canada. The company engages in petroleum transportation, storage and natural gas liquids processing.

Inter Pipeline owns an extensive network of pipeline systems spanning over 7,800 kilometers and transports over 1.4 million barrels per day. In addition, the company also owns petroleum and petrochemical storage terminals with a combined storage capacity of 37 million barrels across Europe. It operates one of the largest NGL businesses in Canada with a processing capacity of 3.5 bcf/d in 2018.

Inter Pipeline operates four business segments namely oil sands transportation (48% of 2018 earnings), NGL processing (34%), conventional oil pipelines (13%) and bulk liquid storage (5%). The company derives 95% of its earnings from Canada and the remaining 5% from Europe.

Inter Pipeline has come a long way in the last 20 years with ownership of an extensive energy infrastructure base and an expanding geographical footprint in six countries. The company is developing Canada’s first integrated propane dehydrogenation and polypropylene facility which will be a key part of its growth strategy over the coming years.

Investment Data

Revenue Growth & Market Exposure

With two decades of experience under its belt, Inter Pipeline has witnessed several ups and downs in the energy industry, yet stands strong today. The company is known for its industry-leading project execution.

Oil sands transportation is Inter Pipelines’ largest business segment that continues to generate consistent FFO. The company owns and operates quality energy infrastructure assets which enable nearly 70% of its earnings from cost-of-service and fee based contracts. Over 20 years (or 40 years if extension provisions are exercised) of remaining on cost-of-service contracts grants enough visibility to stable cash flows. Its commodity-based cash flow is further reinvested to support growth opportunities.

About 97% of Inter Pipelines’ oil sands transportation earnings are determined by investment grade partners such as Chevron, Exxon Mobil, Cenovus, Imperial etc.

IPL - Credit Strength
Source: IPL Investor Presentation

Inter Pipeline is one of Canada’s largest NGL processing businesses and continued to benefit from favorable frac-spreads and strong demand in 2018. Its European bulk liquid storage business further adds geographical and market diversity to its asset base.

The company is growing organically as well as through acquisitions. Acquisition of NuStar Europe increased Inter Pipeline’s total European storage capacity by more than 30%. The company is also investing aggressively to strengthen and expand its pipelines across Canada. Its $82 million expansion plan of the Central Alberta Pipeline is expected to be fully operational in Q2 2020 and generate ~$20 million of annual EBITDA.

Strategically located extensive energy infrastructure assets positions Inter Pipeline better for future growth opportunities both locally and internationally.

Dividends

Inter Pipeline has a solid track record of stable growth and financial performance. The company has successfully registered a 12% CAGR in FFO per share over the last five years. Its dividends are strongly supported by cost-of-service and fee-based cash flow. Over 80% of Inter Pipeline’s revenue is sourced from investment grade entities.

2018 marked the tenth year of consistent annual dividend increase when this Canadian Dividend Aristocrat raised its dividend by 1.8%. Inter Pipeline has compounded its dividends at more than 9% over the last five years. The company sports a high dividend yield of 7.9% and currently pays $1.71 in dividends for every share on an annual basis.

Though the company has a high payout ratio, Inter Pipeline’s assets are well-contracted to provide enough cash flow stability to support dividend growth. The company maintains strong investment grade credit ratings due to its sound financial position and stable businesses. Its upcoming Heartland complex project is expected to add approximately $450 to $500 million of average annual EBITDA, driven by strong demand growth of polypropylene in the US.

Ownership of world-scale energy infrastructure assets in strategic locations, stable and diversified FFO and attractive future growth opportunities should support dividend growth in the future.

Competition

Enbridge Inc TSE:ENB, TransCanada Corp TSE:TRP, Pembina Pipeline Corp TSE:PPL, and Keyera TSE:KEY are Inter Pipeline’s leading competitors.

Enbridge is Canada’s largest natural gas distribution provider while Pembina Pipeline is a leading midstream and transportation service provider in North America. TransCanada Pipeline is a North American infrastructure company, supplying more than 25% of natural gas consumed daily across North America. Keyera’s predominantly fee-for-service based and integrated business differentiate it from peers.

TickerCompanySectorIndustryScoreQuoteMarketCapPEFPEEPSYieldPayoutRatioPaymentsDividendChowderGraph
ENBEnbridgeEnergyOil & Gas - Midstream64%$49.4199.9633.8419.06$1.465.97%202.19%4$2.9518.98%1
TRPTranscanada PipelinesEnergyOil & Gas - Midstream89%$62.9558.3515.0615.62$4.184.77%71.77%4$3.0011.49%1
PPLPembina PipelineEnergyOil & Gas - Midstream72%$47.6324.2921.2619.94$2.245.04%107.14%12$2.409.20%1
IPLInter Pipeline LtdEnergyOil & Gas - Midstream70%$20.758.3813.5617.92$1.538.24%111.76%12$1.7112.54%1
KEYKeyera CorpEnergyOil & Gas - Midstream83%$31.256.5816.3619.03$1.915.76%94.24%12$1.8012.69%1
ALAAltaGasEnergyOil & Gas - Midstream77%$18.655.1515.6718.76$1.195.15%80.67%12$0.964.97%1
GEIGibson Energy Inc.EnergyOil & Gas - Midstream75%$22.093.2114.4426.44$1.535.98%86.27%4$1.327.01%1

Bottom Line

Inter Pipelines’ diversified asset portfolio generates long-term and predictable cash flows that are supported by investment grade parties. Its HPC project also represents a good opportunity to earn a strong return on invested capital upon completion. Inter Pipeline is well-positioned to sustain dividends, with upside growth potential given its extensive energy infrastructure base, strong operational efficiency, and upcoming capital projects.

Due to the challenging situation of delivering energy to customers in Canada, IPL may struggle but management appears to understand the challenges by diversifying geographically. The big players are established and I would focus on the geographical growth plans to assess growth.

I do not like these previous income trusts that pay monthly dividend as the standard is quarterly as it gives a bit more room to manage the dividend. While you may be impressed by the high yield, it is entering dangerous territory at these levels. Is it safe? From a number perspective, it appears to be but growth expectations is keeping the stock price to the mid-range of its high while TRP, ENB, and PPL are trading near the top. So what’s missing? This stock is a NO for my portfolio as it is not the leader in its business.

DISCLOSURE: Please note that I may have a position in one or many of the holdings listed. For a complete list of my holdings, please see my Dividend Portfolio.

DISCLAIMER: Please note that this blog post represents my opinion and not an advice/recommendation. I am not a financial adviser, I am not qualified to give financial advice. Before you buy any stocks/funds consult with a qualified financial planner. Make your investment decisions at your own risk – see my full disclaimer for more details.
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