Too much exposure to oil for the long term

Inter Pipeline is an integrated energy infrastructure company in Canada dealing in petroleum transportation, storage, and natural gas liquids processing. Inter Pipeline owns an extensive network of oil pipeline systems spanning over 3,900 kilometers in Western Canada 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 19 million barrels across Europe. Its natural gas and off-gas processing facilities are capable of producing over 240,000 b/d of NGL and its three pipeline systems have 2.3 million b/d of contracted capacity.

Inter Pipeline operates four business segments namely oil sands transportation (59% of 2020 EBITDA), NGL processing (16%), conventional oil pipelines (13%), and bulk liquid storage (12%). The company derives 95% of its earnings from Canada and the remaining 5% from Europe.

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

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Investment Data
 

Revenue Growth & Market Exposure

With two decades of experience under its belt, Inter Pipeline has earned a strong reputation 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 that enable nearly 90% of its earnings from cost-of-service and fee-based contracts. Strategically located extensive energy infrastructure assets position Inter Pipeline better for future growth opportunities both locally and internationally.

Inter Pipeline is one of Canada’s largest NGL processing businesses and continues to benefit from favorable frac-spreads and strong demand. 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. It has also constructed Canada’s first integrated propane dehydrogenation and polypropylene complex.

Inter Pipeline achieved a number of milestones related to construction activities at the Heartland Petrochemical Complex, a multi-phase build-out of the Central Alberta pipeline system, and the sale of its European bulk liquid storage business. Inter Pipeline’s ~$4 billion HPC project represents the largest organic growth project in the company’s history and is expected to add ~$450-500 million of long-term average annual EBITDA.

Inter Pipeline is also undertaking prudent pipeline connections and expansion projects, which once operational will provide improved market access and flexible transportation service solutions to its customers.Inter Pipeline’s oil sand transportation generated a record annual FFO of $616 million during the last year.

The conventional oil pipeline business was negatively impacted by lower throughput and lower crude oil prices. It also sold a major portion of the European bulk liquid storage business. The company continued to progress on the construction of the Heartland Petrochemical Complex and successfully completed ~$180 million multi-phase pipeline expansion in 2020.

Dividends

Inter Pipeline has a solid track record of stable growth and financial performance. It has compounded its dividends at 8%+ in the last decade. The company sports a dividend yield of 2.7% and has a payout ratio of 57%.

Inter Pipeline reset its monthly dividend to $0.04 per share, slashing it by ~70% which allowed for retaining over $0.5 billion of incremental cash annually.

Inter Pipeline’s assets are well-contracted to provide enough cash flow stability to support dividend growth. Its oil sands FFO remained relatively stable in the last year due to long-term cost-of-service contracts that were not materially impacted by throughput volume fluctuations.

Inter Pipeline maintains strong investment-grade credit ratings due to its sound financial position and stable businesses. Its cash flows are also stable with about 75% of 2020 Canadian revenue being sourced from investment-grade entities and ~90% of its 2020 EBITDA coming from cost-of-service and fee-based contracts.

Furthermore, Brookfield Infrastructure Partners will acquire all of the outstanding Inter Pipeline’s shares. Shareholders are entitled to receive either cash or shares of BIP in exchhange of IPL shares.Inter Pipeline continues to generate strong funds from operations underpinned by strong and stable contributions from its oil sands transportation and conventional oil pipeline businesses.

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.

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Competition

Enbridge, TC Energy, Pembina Pipeline, and Keyera Corp 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. 

TickerKeyTickerCompanySectorIndustryScoreQuoteMarket CapP/EFPEEPSYield RawYieldPayoutRatioPaymentsDividendChowderGrowthRatingIncomeRatingTollboothAmbassadorAchieverAristocratKingCountryGraph
TSE:ENBENBEnbridgeEnergyOil & Gas Midstream0.6846.2374.2631.3231.321.480.07227.222.256843.340.188978Tollbooth - UnregulatedYESYESYESNOCanada1
TSE:TRPTRPTC EnergyEnergyOil & Gas Midstream0.7158.7145.9212.3812.384.740.05935.930.734243.480.129669Tollbooth - UnregulatedNOYESYESNOCanada1
TSE:PPLPPLPembina PipelineEnergyOil & Gas Midstream0.6136.6620.160.000.00-0.870.06876.871.0000122.520.111079Tollbooth - UnregulatedNONOYESNOCanada1
TSE:IPLIPLInter Pipeline LtdEnergyOil & Gas Midstream0.4318.097.7621.5721.570.840.02652.650.5714120.480.055425Tollbooth - UnregulatedNONONONOCanada1
TSE:KEYKEYKeyera CorpEnergyOil & Gas Midstream0.5026.465.8594.0394.030.280.07267.266.8571121.920.135667Tollbooth - UnregulatedNONOYESNOCanada1
TSE:GEIGEIGibson Energy Inc.EnergyOil & Gas Midstream0.4422.193.2327.2127.210.820.06316.311.707341.400.063125Tollbooth - UnregulatedNONONONOCanada1

Bottom Line

Inter Pipelines’ diversified asset portfolio generates long-term and predictable cash flows that are supported by investment-grade parties. 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.

A strong portfolio of top-tier energy infrastructure businesses offers significant growth potential. The company should gain from its ongoing development and execution of strategic projects like HPC and Central Alberta pipeline expansion and oil sands growth opportunities in the future.

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