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

Inter Pipeline Ltd. (TSX:IPL) released record third-quarter earnings on November 5, but its stock has reacted by falling over 3.5%. Is this a buying opportunity?

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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.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium service or advisor. We’re Motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer, so we sometimes publish articles that may not be in line with recommendations, rankings or other content.

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

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