Danish acquisition is big move for this Canadian pipeline company

Inter Pipeline Fund image

Pat McKeough responds to many personal questions on specific stocks and other investment topics from the members of his Inner Circle. Every week, his comments and recommendations on the most intriguing questions of the past week go out to all Inner Circle members. And each week, we offer you one of the highlights from these Q&A sessions.

This past week, one Inner Circle member asked about dividend stocks—specifically, about a pipeline firm that is one of Canada’s remaining income funds. The company has just made a major overseas acquisition and Pat assesses the potential risk and rewards.

Q: Pat: I’m looking at Inter Pipeline as a high-dividend pipeline stock for my portfolio. What do you think of it? Thank you.

A: Inter Pipeline Fund (symbol IPL.UN on Toronto; www.interpipelinefund.com), transports, stores, markets and processes oil and natural gas.

The fund has four divisions:

  1. The oil sands division’s pipelines transport 35% of Canadian oil sands production.
  2. The conventional business’s pipelines handle 15% of western Canadian conventional crude oil.
  3. NGL Extraction converts 40% of Alberta’s exported natural gas into natural gas liquids, like ethane, propane and butane.
  4. The storage division operates terminals in the U.K., Germany and Ireland under the Simon Storage banner, and in Denmark under the Inter Terminals brand.

In January 2012, the fund paid $505.9 million for four oil-storage terminals in Denmark. The purchase added 10.7 million barrels to Inter Pipeline’s petroleum capacity, bringing it to a total of 19 million barrels. Inter Pipeline is now the fourth-largest provider of storage services in Europe.


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Dividend stocks: Outlook rises and falls with oil and gas prices

Even with the contribution from the new terminals, Inter Pipeline’s revenue fell 1.9% in the three months ended March 31, 2012, to $297.2 million from $303.0 million a year earlier. That’s mainly due to a 15.8% drop in volumes at NGL Extraction. As well, some of the division’s contracts are based on natural gas prices, which are near historic lows right now. Still, cash flow per unit rose 5.1%, to $0.41 from $0.39.

Inter Pipeline’s outlook generally rises and falls with oil and gas prices. Lower prices prompt producers to cut back their output, which lowers the fund’s revenue, because there is less oil and gas for it to handle. Inter Pipeline’s concentration in Alberta also adds risk.

Starting with the December 2011 payment, Inter Pipeline raised its monthly cash payout by 9.4%, to $0.0875 per unit from $0.08. The new annual rate of $1.05 yields 5.3%.

Inter Pipeline is structured as a limited partnership rather than an income trust. However, like income trusts, Inter Pipeline is now subject to Ottawa’s trust tax, which took effect on January 1, 2011.

Still, the fund paid out 64.7% of its cash flow to unitholders in the latest quarter, so it has been able to maintain, and even raise, its payout. As well, because the payout is now a dividend, it’s eligible for the dividend tax credit if you hold your units outside an RRSP.

In the most recent Inner Circle Q&A, Pat looks at the considerable risks involved in integrating a major acquisition in a new country, and a new business. and whether those risks are offset by the Danish firm’s fixed long-term contracts. He concludes with his clear buy-hold-sell advice on Inter Pipeline Fund.

(Note: If you are a current member of the Inner Circle, please click here to view Pat’s recommendation. Be sure to log in first.)

COMMENTS PLEASE

Many seniors were enraged when the Conservatives made their sudden change in income trust taxation in 2006. Were you one of them? Did you have to change your retirement investing plan as a result? In hindsight, do you think the change was justified? Let us know what you think in the comments section below. Click here.

Comments

  • Bruce M.

    I thought that the change was required. When Telus was going to convert to an income trust just to avoid paying income tax, the situation was clearly going too far. It was opening the possibility that foreigners could buy shares in Canadian ‘income trusts’ that were really corporations, and no-one would pay any tax on those profits.

    Income trusts are well suited to real estate, but not for regular corporations.

    The tax rebates on Canadian corporation dividends are generous and I’m happy to take my dividends that way.

    Canada is a complex, generally well run society, and everyone needs to pay taxes to finance it. We’ve seen what happens (in Greece most recently) when governments don’t charge enough in taxes to run the country.

  • David

    I think the change could have been obtained by cancelling future company conversions and grandfathering those existing. I expect many people were like me using incame trusts to build up RRSP funds for retirement which meant the government would eventually get their share of taxes from withdrawals.
    In the meantime a great deal of capital seemed to disappear. To add insult to injury to a certain age group the TFSA was introduced with no allowance for those already retired to establish a significant income from investments in the TFSA.
    These are some of the thoughts that go through my head when i receive those requests for financial support from the conservative party.

  • D. G.

    I had just retired when this change was legislated by the Government. I won’t dispute that the use of income trusts was getting out of hand. Nevertheless the government moved without any consideration of the hardship this would cause to many retirees who were depending on the trusts as a source of income. This can hardly be viewed as a free market change where one takes their chances but a direct manipulation of the market. Saying the trusts didn’t need to convert until 2011 was a crock of s..t in offering any protection to the trust holders and many trusts tanked very quickly. I still feel the many $1000’s of dollars I personally lost almost overnight could have been mitigated by a less heavy handed approach and could still have a final result which the government required. I will never vote for you know who again.

  • Garry

    Garry in Calgary
    May 28, 2012

    I am not going to take a position on whether the intent of the 2006 income trust changes were justified … there are many ways to paint the picture … but without a doubt the wealth destruction that resulted was, I believe, both wreckless and unwarranted.

    Does anyone know how to spell “moratorium”? Why didn’t the government suspend new trust company applications while it evaluated fully the extent to which these changes might affect ownership, taxes and royalty trust unit holders like the seniors who trustingly put their life savings into these funds with the hope of receiving a fair return.

    Why didn’t Ottawa grandfather the existing trusts in an effort to protect the existing investors? How about changing the rules for the major telecom companies and taking away some of their wireless bandwidth because the airways are getting too full? Do we think that would be fair or would we decide to do something reasonable, like maybe limit the ongoing use of bandwidth or at least talk about possible solutions to the perceived problem. Now, I’m not proposing that by any means. I’m just asking a question. Where is the line?

    I take no issue with paying taxes to support infrastructure. This is a great country and we need health and education, highways and bridges. But let’s think about the side affects of what might be affected before we embark on a sweeping course of action like this again. Let’s be sensible about our approach.

    No, the issue was not just about what happened to trust companies going forward. The other issue was about what happens to existing stakeholders. You know, those who invest with faith, with certain expectations of stability and long-sightedness. This issue was and is about what happens to the Canadians who have invested in the infrastructure of their country through their equity ownership in it. Those folks, those investors were left holding a much smaller investment bag at the end of the day. That my friends is worth thinking about. Think about it.

  • Jack M.

    Harper visited senior establishments and told the seniors hw would not do away with the trusts. Once elected he not only did away with the trusts he never explained why. I vote conservative but I don’t trust Harper, he’s just another politician.

  • bob c.

    I Have a love hate relationship with the conservatives. Ilike the fact that the gun registration is gone. I am glad that I sold all my income trusts two months befor halloween. I went on holiday and just had a gut feeling. WHY DO POLITICIANS THAT GET IN POWER HAVE TO UNDO WHAT THE PREVIOUS PARTY DID? Now the conservatives are going after fisheries! I GUESS I HAVE TO HOLD MY NOSE AND VOTE NDP.

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