Inter Pipeline Ltd. (TSX:IPL) operates in the shadows of its larger peers, but the company is starting to get more respect from the market.
Here are the reasons why I think dividend investors should put the company on their radar.
1. Diverse business operations
Inter operates more than 7,000 km of petroleum pipelines and 4.8 million barrels of storage in western Canada. All-in, the company moves about 35% of all oil sands production and 15% of western Canada’s total conventional oil output.
Inter also runs one of North America’s largest natural gas extraction operations with ownership positions in three major southern Alberta facilities. The plants process about 40% of Alberta’s natural gas exports.
The third pillar of the company’s revenue stream is its bulk liquids storage operations. Inter runs one of Europe’s largest independent tank storage businesses with assets located in the U.K., Ireland, Germany, Denmark, and Sweden.
2. Earnings strength
Inter just reported strong Q2 2015 results despite the headwinds facing the Canadian energy patch. Funds from operations hit a record $181 million, a 37.5% increase over the same period last year.
Net income for the first six months of the year increased to $196.6 million, a 12% increase over the first half of 2015.
Higher revenues coming from the oil sands operations drove the strong numbers, primarily as a result of new assets going into operation. The company’s bulk storage operations also got a boost on the back of improved utilization rates.
The company’s NGL extraction business had a weaker Q2 due to reduced frack-spread pricing.
3. Strong balance sheet
Inter has a strong balance sheet with more than $570 million available on its credit facility. Total recourse debt-to-capitalization is under 55% and within management’s target range. The company maintains investment grade credit ratings.
4. Dividends
Inter Pipeline pays a monthly dividend of 12.25 cents, or $1.47, on an annualized basis. The company has increased the distribution by more than 50% in the past four years.
The payout ratio is about 72%, which means the distribution should be safe. Right now investors are getting a yield of 5.25%.
Outlook
Inter continues to execute well in a sector that is under extreme pressure. The ongoing rout in the oil market coupled with higher taxes in Alberta will certainly impact the company’s earnings going forward, but Inter has new revenue streams coming online outside of Alberta that should help offset the slowdown.
In Saskatchewan Inter just completed a $112 million expansion on its Mid-Saskatchewan pipeline system and is working on a $65 million storage tank expansion that will add 400,000 barrels of storage capacity. That project should be in service in 2016.
