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 first-quarter earnings after the market closed on May 11, and its stock has responded by making a slight move to the downside. Let’s take a closer look at the quarterly results to determine if this weakness represents a long-term buying opportunity, or a warning sign.
Breaking down the record-setting performance
Here’s a summary of Inter Pipeline’s first-quarter earnings results compared with its results in the same period a year ago.
| Metric | Q1 2015 | Q1 2014 |
| Diluted Earnings Per Share | $0.34 | $0.27 |
| Total Revenue | $405.79 million | $410.74 million |
Source: Inter Pipeline Ltd.
Inter Pipeline’s earnings per share increased 25.9% and its revenue decreased 1.2% compared with the first quarter of fiscal 2014. The company’s strong earnings-per-share growth can be attributed to its net income increasing 32.1% to $113.73 million, which was helped by its total operating expenses decreasing 14.5% to $248.66 million.
Its slight decline in revenue can be attributed to frac-spread pricing decreasing 60.6% year over year, which led to revenues falling 39.1% to $102.54 million in its NGL Extractions segment.
Here’s a quick breakdown of 12 other notable statistics from the report compared with the year-ago period:
- Total pipeline throughput volumes increased 27.5% to a record 1,311,900 barrels per day
- Total extraction production increased 3.5% to 113,000 barrels per day
- Revenue increased 68.8% to $177.37 million in its Oil Sands Transportation segment
- Revenue decreased 14.7% to $77.81 million in its Conventional Oil Pipelines segment
- Revenue increased 4.6% to $48.07 million in its Bulk Liquid Storage segment
- Funds from operations increased 34% to a record $176.5 million
- Funds from operations increased 23.3% to a record $0.53 per share
- Declared record cash dividends of $121.8 million, or $0.3675 per share, compared with dividends totaling $99.6 million, or $0.3225 per share, in the year-ago period
- Cash provided by operating activities increased 18.2% to $158.58 million
- Total capital expenditures decreased 74.2% to $142 million
- Ended the quarter with $62.95 million in cash and cash equivalents, an increase of 3% from the beginning of the quarter
- Weighted average number of shares outstanding increased 7.3% to 331.5 million
Does Inter Pipeline belong in your portfolio?
Inter Pipeline posted a very strong first quarter performance, so I think the slight drop in its stock is simply a result of overall weakness in the market. I also think the weakness represents nothing more than a long-term buying opportunity.
First, Inter Pipeline’s stock now trades at just 23.3 times fiscal 2015’s estimated earnings per share of $1.31 and only 21.9 times fiscal 2016’s estimated earnings per share of $1.39, both of which are inexpensive compared with the industry average price-to-earnings multiple of 40.4. I think the company’s stock could consistently command a fair multiple of at least 28, which would place its shares upwards of $36.50 by the conclusion of fiscal 2015 and upwards of $38.75 by the conclusion of fiscal 2016, representing upside of more than 19% and 27%, respectively, from current levels.
Second, Inter Pipeline pays a monthly dividend of $0.1225 per share, or $1.47 per share annually, giving its stock a 4.8% yield at today’s levels. The company has also increased its dividend seven times in the last six years, making it one of the top dividend-growth plays in the industry today.
With all of the information provided above in mind, I think Inter Pipeline represents one of the best long-term investment opportunities in the market today. Foolish investors should take a closer look and strongly consider making it a core holding.
