Pat McKeough recently replied to an Inner Circle member looking for an opinion on Inter Pipeline Ltd. as it prepares for $1.35 billion acquisition. That move, says Pat, carries some risk.
Q: Hi Pat: Can you please comment on Inter Pipeline? Thanks.
A: Inter Pipeline Ltd., $27.30, symbol IPL on Toronto (Shares outstanding: 359.4 million; Market cap: $9.2 billion; www.interpipeline.com), transports, stores, markets and processes oil and natural gas.
On September 1, 2013, Inter Pipeline changed from a limited partnership to a conventional corporation. It continues to have four main businesses:
The oil sands operation (46% of its revenue) has three pipelines in Alberta that serve the Cold Lake and Athabasca oil sands projects.
Conventional oil pipelines (19%) transport crude oil across Alberta and Saskatchewan.
NGL Extraction (22%) converts Alberta natural gas to natural gas liquids (NGLs) such as ethane, propane and butane.
The bulk liquid storage business (13%) operates terminals in the U.K., Germany, Ireland, Denmark and Sweden.
Inter Pipeline’s revenue rose 45.6%, from $1.15 billion in 2011 to $1.7 billion in 2015. Overall cash flow jumped 96.3%, from $394.2 million to $774.0 million. Due to more shares outstanding, cash flow per share rose at the slower rate of 52.0%, from $1.52 to $2.31.
These gains are mainly because the company has expanded its operations in the past few years. From mid-2014 to the end of 2015, it put into service $3.0 billion in new pipelines and other projects.
Thanks to this expansion, Inter Pipeline’s revenue in the three months ended June 30, 2016, rose 5.7%, to $413.0 million from $390.6 million a year earlier. Cash flow gained 8.7%, to $196.7 million from $181.0 million; cash flow per share improved 7.4%, to $0.58 from $0.54, on more shares outstanding.
The company ended the quarter with cash of $40.2 million. Its long-term debt of $3.05 billion is equal to 33% of its market cap.
In August 2016, Inter Pipeline agreed to buy the Canadian NGL-processing operations of Williams Companies Inc., symbol WMB on New York.
The company will pay $1.35 billion for those assets. Due to the recent drop in NGL prices, that’s 45% less than what it cost Williams to build the facilities.
The operations should immediately add to Inter Pipeline’s cash flow. As well, it expects tax savings will total $70 million between 2017 and 2019.
To help pay for this acquisition, Inter Pipeline sold 22.4 million subscription receipts at $26.75 each for a total of $600.0 million. Each receipt will get converted to one common share when the company completes the purchase later this year.
Major acquisitions like this add risk. However, the new operations are a good fit with Inter Pipeline’s existing NGL business, especially when NGL prices move up again.
The company pays a monthly dividend of $0.13 a share. The annual rate of $1.56 yields 5.7%. Inter Pipeline has raised the payout annually for the past 13 years.
The company’s outlook generally rises and falls with oil and gas prices. Lower prices prompt producers to cut back their output. That, in turn, lowers Inter Pipeline’s revenue, because there is less oil and gas for it to handle. The company’s concentration in Alberta also adds risk.
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