Inter Pipeline Ltd. (TSX:IPL) has a consistent dividend payout and a high dividend yield and has achieved significant presence in NGL extraction and storage
SmallCapPower | January 2, 2018: Inter Pipeline Ltd. (TSX:IPL), based in Calgary, Alberta, is a leading oil sands pipeline operator with combined ultimate capacity of 4.6 million b/d, 3,300 km of pipeline and 3.8 million barrels of storage. With the acquisition of Williams Canada in late 2016, Inter Pipeline has also achieved significant presence in NGL extraction and storage. The Company’s low-risk business model of building infrastructure assets and selling their use to creditworthy customers under long-term contracts ensures stable and consistent revenue and cash-flow generation, which in turn has allowed Inter Pipeline to declare consistent dividend payouts. At the current price, Inter Pipeline stock offers an attractive dividend yield of 6.5%, making it a compelling pick for dividend investors.
Investment thesis
- Energy infrastructure assets across oil sands, NGL, and conventional
- Low-risk business model
- Consistent dividend payout and high dividend yield
Diverse and global-scale energy infrastructure assets
Inter Pipeline operates one of the largest petroleum transportation and bulk liquid storage businesses with assets spread across Western Canada and Europe. The Company boasts of large and continued increase in capacity in each of its four business segments: Oil Sands Transportation, NGL Processing, Conventional Oil Pipelines, and Bulk Liquid Storage.
The largest segment, Oil Sands Transportation, owns three major oil sands pipeline systems (Corridor, Cold Lake, Polaris) with combined ultimate capacity of 4.6 million b/d, 3,300 km of pipeline and 3.8 million barrels of storage. In the NGL space, Inter Pipeline has large scale infrastructure comprising three straddle plants strategically located on the TransCanada Alberta System, two off-gas plants that have dedicated supply agreements, and Boreal pipeline with low cost expansion up to 125,000 b/d. The conventional oil pipelines segment with 3,900 km of oil pipelines serves over 100 producers on a 100% fee-based model. Bulk liquid storage segment comprises 16 petroleum and petrochemical storage terminals with ~ 27 million barrels of storage capacity.
Low-risk business model
Unlike oil and gas producers that incur heavy capex on production, pipeline or energy infrastructure companies typically have low capex along with recurring revenue streams. Inter Pipeline’s low-risk business model of buying/building infrastructure assets and selling their use to creditworthy counterparty under long-term contracts ensures stable and consistent revenues with minimal risk. In 2016, Inter Pipeline generated more than 90% of Oil Sands and NGL revenues from investment-grade customers.
Concerns on proposed polypropylene plant overdone
Inter Pipeline expanded into the NGL extraction and storage business through the acquisition of Williams Canada in late 2016. As part of the acquisition, the Company announced plans to construct a Propane Dehydrogenation and Polypropylene plant and recently (Dec 18th 2017) confirmed that it will proceed with the construction of the facility referred to as Heartland Petrochemical Complex. Investors have been wary of this investment as the construction will require a massive $3.5 billion in capex and may be dilutive to shareholders, as the funding will be met through a combination of debt and equity. The worry has kept the stock price of Inter Pipeline depressed for most of this year, although it has risen ~10% over the past two months on rising oil prices. The Company’s announcement to proceed with the construction has been taken after proper due diligence and the required capital should not be unmanageable given Inter Pipeline has $1.1 billion of its $3.05 billion credit facility unutilized and its track record of successfully raising debt and issuing equity over the past few years.
Notwithstanding the huge capex, the facility is estimated to generate $450- $500 million of long-term annual average EBITDA, be accretive to future funds from operations per share. Expected to be completed by 2021, the facility can process 22,000 BPD of propane into 525,000 tons per year of Polypropylene, the largest single plastic globally that is expected to grow by 25% through 2021, as per an IHS Markit report.
High dividend yield
Consistent and growing revenue and cash flows have allowed Inter Pipeline to make high dividend payouts over the past several years. Since inception, the Company has distributed ~$4.4 billion as dividends to shareholders and has increased its dividend payout for 15 consecutive years. The latest increase to $1.68 per share translates into an attractive dividend yield of 6.5%, higher than its peers TransCanada (TSX:TRP), Enbridge (TSX:ENB), and Pembina Pipeline (TSX:PPL). While the dividend increase may not be dramatic in the near term on account of the proposed petrochemical plant, low volatile and a stable business should ensure consistently high dividend payouts.
Outlook and valuation
Consistent dividend payouts and high dividend yield makes Inter Pipeline appealing for dividend investors. Worries about the impact of proposed petrochemical plant on capex are unwarranted as the Company has necessary funding options. In terms of valuation too, Inter Pipeline stock looks attractive at an EV/EBITDA of 51x compared to its peer average of 79.0x.
Disclosure: Neither the author nor any of the principals at SmallCapPower, or their family members, own units in any of the companies mentioned above.
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