A Member of Pat McKeough’s Inner Circle recently asked for his advice on a company that transports, stores, markets and processes oil and natural gas in Alberta, Saskatchewan and internationally.
Pat likes the firm’s steady revenue and cash flow growth since 2013 and feels the high dividend is safe for investors. However, the stock is vulnerable to volatile fluctuations in oil and gas prices.
Q: Can I get your recommendation on Inter Pipeline? It pays a high dividend. Thanks.
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Inter Pipeline Ltd., (Symbol IPL on Toronto; www.interpipeline.com), transports, stores, markets and processes oil and natural gas.
On September 1, 2013, the company changed from a limited partnership to a conventional corporation. It is based in Calgary and has four business segments:
The oil sands operation (31% of its revenue) has three pipelines in Alberta that serve the Cold Lake and Athabasca oil sands projects. These operate on long-term cost-of-service contracts, which insulates this business segment’s revenue stream from oil price fluctuations.
Conventional oil pipelines (29%) transport crude oil across Alberta and Saskatchewan. These pipelines operate on a mix of cost-of-service, fee-based, and commodity-based contracts. Its revenues are therefore less insulated from oil price fluctuations.
NGL Extraction (33%) converts Alberta natural gas to natural gas liquids (NGLs) such as ethane, propane and butane.
The bulk liquid storage business (7%) operates terminals in the U.K., Ireland, Germany, Denmark and Sweden.
Inter Pipeline’s revenue increased 64.3%, from $1.4 billion in 2013 to $2.3 billion in 2017. It jumped another 13.0% in 2018, to $2.6 million. Over the same time, cash flow improved 130.6%, from $472.6 million in 2013 to $1.09 billion in 2018, to $2.6 million. Cash flow per share has increased 70.7%, from $1.65 per share in 2013 to $2.80 in 2018, on more shares outstanding. The gains are mainly because the company has expanded its operations in the past few years.
Overall revenue in the three months ended March 31, 2019, rose 2.0%, to $658.9 million from $646.0 million a year earlier. Cash flow per share fell 22.4%, to $0.52 from $0.67. The drop was mainly due to high fuel, power and transportation costs, plus lower prices because of increasing competition.
Inner Circle: New $3.5 billion plant construction gets started
In January 2018, Inter Pipeline began construction of the Heartland Petrochemical Complex, a major integrated plant that converts propane into high-profit-margin polypropylene plastic. The company will spend a total of $3.5 billion on the project, which is located in Fort Saskatchewan, Alberta. Its completion is scheduled for the end of 2021, and Inter Pipeline expects the complex to add $500 million to its cash flow each year.
In October 2018, the company acquired NuStar Europe for $270 million U.S. That firm owns seven coastal bulk liquid storage and blending terminals, totalling 9.1 million barrels of storage capacity. One of those facilities is in Amsterdam, and the others are in the U.K. NuStar will increase Inter Pipeline’s storage capacity by 33% to 37 million barrels and establish it as the largest independent storage operator in the U.K. The new operations are located in key industrial centres, which historically generate stable cash flow.
Inter Pipeline’s outlook generally rises and falls with oil and gas prices. Lower prices prompt producers to cut back on their output. That, in turn, lowers revenue for pipeline operators because there is less oil and gas for them to handle. However, a lot of the company’s pipelines operate under long-term contracts with shippers, so that helps keep its revenue high.
With its December 2018 payment, Inter Pipeline raised its monthly dividend by 3.6%, to $0.145 from $0.140. The shares now yield a high 7.7%. However, that dividend is well covered by cash flow and appears safe. The stock currently trades at a modest 9.7 times the 2019 cash flow forecast of $2.28 per share.
The company’s concentration in Alberta adds to its risk, as does its acquisitions. Still, Inter Pipeline’s ongoing expansion in Europe and the U.K. offsets some of its geographic risk, and the company aims to buy other profitable operations.
Thanks for your question. As mentioned in the analysis: The company’s concentration in Alberta adds to its risk, as does its acquisitions. Still, Inter Pipeline’s ongoing expansion in Europe and the U.K. offsets some of its geographic risk, and the company aims to buy other profitable operations. Recommendation in Pat’s Inner Circle: Inter Pipeline Ltd. is a hold—and we don’t recommend it for new buying.
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X No, I don’t want to make steady income from dividends.
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Hello Pat and team I take it your not recomending new buying of interpipeline ipl. tsx thankyou Ron.
Thanks for your question. As mentioned in the analysis: The company’s concentration in Alberta adds to its risk, as does its acquisitions. Still, Inter Pipeline’s ongoing expansion in Europe and the U.K. offsets some of its geographic risk, and the company aims to buy other profitable operations. Recommendation in Pat’s Inner Circle: Inter Pipeline Ltd. is a hold—and we don’t recommend it for new buying.