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Do Inter Pipeline Ltd.’s Record Q3 Results Signal a Buying Opportunity?

Inter Pipeline Ltd. (TSX:IPL), one of largest providers of petroleum transportation, bulk liquid storage, and natural gas liquids extraction services in western Canada and northern Europe, announced record third-quarter earnings results after the market closed on November 5, but its stock has responded by falling over 3.5% in the trading sessions since.

The stock now sits more than 33% below its 52-week high of $36.12 reached back in December 2014, so let’s take a closer look at the results and the fundamentals of its stock to determine if we should consider using this weakness as a long-term buying opportunity.

Breaking down the record-setting performance

Here’s a summary of Inter Pipeline’s third-quarter earnings results compared with its results in the same period a year ago.

Metric Q3 2015 Q3 2014
Diluted Earnings Per Share $0.35 $0.28
Total Revenue $424.19 million $379.63 million

Source: Inter Pipeline Ltd.

Inter Pipeline’s earnings per share increased 25% and its revenue increased 11.7% compared with the third quarter of fiscal 2014. Its very strong earnings-per-share growth can be attributed to its net income increasing 35.1% to a record $128.41 million and its net income attributable to shareholders increasing 29.9% to $118.7 million, helped by its total operating expenses increasing just 0.1% to $257.06 million.

Its very strong revenue growth can be attributed to its revenues increasing 52.3% to $195.18 million in its Oil Sands Transportation segment due to its 18.8% increase in transportation volumes to 1.12 million barrels per day, and 37.4% to $57.13 million in its Bulk Liquid Storage segment due to its storage utilization rate improving to 93% from just 78% in the year-ago period.

Here’s a quick breakdown of 10 other notable statistics from the report compared with the year-ago period:

  1. Total pipeline throughput volumes increased 16.1% to a record 1.33 million barrels per day
  2. Conventional oil pipeline throughput volumes increased 3.4% to 209,400 barrels per day
  3. Total extraction production increased 26.6% to 102,800 barrels per day
  4. Extraction production of ethane increased 28.6% to 62,000 barrels per day
  5. Extraction production of propane plus increased 23.6% to 40,800 barrels per day
  6. Revenues decreased 9.7% to $80.9 million in its Conventional Oil Pipelines segment
  7. Revenues decreased 24.4% to $90.97 million in its NGL Extraction segment
  8. Adjusted earnings before interest, taxes, depreciation, and amortization increased 39% to $255.7 million
  9. Funds from operations increased 45.6% to a record $205.2 million
  10. Cash provided by operating activities increased 65.3% to $204.62 million

Inter Pipeline also announced a 6.1% increase to its monthly dividend to $0.13 per share, and the next payment will come on December 15 to shareholders of record at the close of business on November 23.

Should Inter Pipeline be on your long-term buy list?

It was an outstanding quarter overall for Inter Pipeline, so I think the post-earnings weakness in its stock represents nothing more than a long-term buying opportunity, especially because it now trades at even more attractive forward valuations and because it has a high dividend and is a dividend-growth play.

First, Inter Pipeline’s stock now trades at just 18.7 times fiscal 2015’s estimated earnings per share of $1.29 and only 16.6 times fiscal 2016’s estimated earnings per share of $1.45, both of which are very inexpensive compared with its five-year average price-to-earnings multiple of 29.9.

I think its stock could consistently trade at a fair multiple of at least 20, which would place its shares around $29 by the conclusion of fiscal 2016, representing upside of more than 20% from today’s levels, and this does not include reinvested dividends.

Second, Inter Pipeline now pays an annual dividend of $1.56 per share, which gives its stock a very generous 6.5% yield, and this is more than double the industry average yield of 3.2%. It is also very important to note that the company has raised its dividend for seven consecutive years, and its increased amount of funds from operations, including 39.2% year-over-year growth to $562.7 million in the first nine months of fiscal 2015, could allow this streak to continue in 2016.

With all of the information provided above in mind, I think Inter Pipeline represents one of the best long-term investment opportunities in the energy sector today. Foolish investors should strongly consider making it a core holding.

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Fool contributor Joseph Solitro has no position in any stocks mentioned.

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