Morningstar | Lower Volumes for Inter Pipeline, but Stock Maintains Strong 7% Yield
No-moat Inter Pipeline reported second-quarter adjusted funds from operations of CAD 262 million, a 26% increase from the year-ago period and slightly below our expectations. The increase from the prior year was driven by strong performance from the natural gas liquids processing business, which benefited from rising commodity prices. However, we expected higher cash flows from the company’s oil sands operations. Total oil sands throughput declined sequentially to 1.181 million barrels of oil per day from a record high of 1.279 mmb/d in the first quarter. Lower throughput was a result of deferred oil sands production due to maintenance and turnaround activities.The company also announced plans to expand its Stettler Crude Oil Terminal. The project consists of two 130,000 barrels per day crude oil storage tanks and a truck unloading expansion. The first tank is scheduled to come into service in 2019, while the second tank is scheduled for 2020. The project is estimated to cost CAD 82 million, and the company believes that it can generate CAD 20 in annual EBITDA once fully in service.
Despite the slight underperformance, our long-term forecasts remains intact. Accordingly, we are maintaining our CAD 25 fair value estimate and no-moat rating. Shares are trading above CAD 24 per share, and the stock looks fairly valued. However, the stock offers an annual divided of CAD 1.68 per share, which equates to a 7% yield. Overall, Inter Pipeline is in a strong position to benefit from the growing oil sands production in Canada while rewarding investors with an industry-leading dividend. Inter Pipeline offers investors an elite dividend stock to add to their portfolio despite the lack of upside.
For a detailed look into the Canadian crude and pipeline trends, please refer to our September Energy Observer, "Don't Overlook Oil Sands: Falling Costs and More Infrastructure Will Make Canadian Production Globally Competitive."
Inter Pipeline is engaged in the business of of petroleum transportation, bulk liquid storage and natural gas liquids (NGL) extraction through the ownership and operation of energy infrastructure assets in western Canada, the U.K., Denmark, Germany, Ireland and Sweden. Co. has four operating business segments that are reportable segments: the oil sands transportation business segment; the conventional oil pipelines business segment; the bulk liquid storage business segment; and the NGL extraction business segment.
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