Inter Pipeline Ltd. (TSX:IPL) comes with an attractive yield, but investors are still avoiding names connected to the energy sector.
Let’s take a look at the current situation to see if this stock deserves to be in your portfolio.
Solid results
Inter Pipeline generated strong results for the first quarter of 2016. Funds from operations (FFO) came in at $186 million, up 5% from the same period last year.
The oil sands pipeline operations generated $139.4 million in FFO, up 7% compared with Q1 2015. Improved throughput on the system and the addition of new extensions should ensure continued revenue growth in the coming years.
The conventional oil pipelines delivered FFO of $50 million in the first quarter, up a surprising 7% compared with last year. The company has a significant presence in the Viking light oil play in Saskatchewan, which continues to enjoy growth despite the difficulties in the broader sector.
Inter Pipeline owns a bulk liquids storage business in Europe. The division is seeing strong demand for its services and generated FFO of $31.3 million in Q1 2016, a 53% increase over the previous year. Utilization rates are at 98% and Inter Pipeline continues to add new assets to the group.
The company’s NGL extraction operation is the only laggard. The unit produced FFO of $23.6 million in the first quarter, down from $28.7 million last year.
Overall, Inter Pipeline is performing well in a challenging environment.
Dividends
Most of Inter Pipeline’s revenue is secured by long-term contracts with large, stable companies.
In November Inter Pipeline raised its monthly dividend by 6% to 13 cents per share. The payout ratio was 74.6% for Q1 2016, so cash flow is more than adequate to cover the distribution, and the dividend should be safe.
Investors could see an additional increase in the payout as new assets go into service later this year and in 2017.
Should you buy?
The stock isn’t as cheap as it was a few months ago, but investors can still pick up Inter Pipeline for a reasonable price and collect a solid 5.8% yield. As the energy sector recovers, investors should see further gains, and I wouldn’t be surprised to see the stock become the target of a takeover bid by one of the pipeline giants.
