Inter Pipeline Ltd. (TSX:IPL) just reported solid Q2 2016 results and announced a huge acquisition.
Let’s take a look at the current situation to see if this is the right time to add the stock to your portfolio.
Inter Pipeline owns a natural gas liquids (NGL) extraction business, oil sands infrastructure, conventional oil pipelines, and a European liquids storage operation.
Funds from operations (FFO) for the second quarter came in at $197 million, up 9% over the same period last year.
The NGL extraction segment has been the weak link during the oil rout, but it looks like the market is improving as FFO from the group rose 31% to $31 million.
Oil sands transportation generated FFO of $141.4 million, up 5% from the same period last year. Despite the challenges in the market, oil sands operators continue to produce at a healthy clip. As a result, Inter Pipeline saw its Q2 throughput in the segment rise 19% over the same period last year.
The conventional oil pipelines squeaked out a small year-over-year gain in Q2 compared with last year. FFO totaled $47.1 million for the quarter, up from $46.5 million in 2015.
Business is also rolling along quite nicely in Europe. The bulk liquids storage division generated FFO of $29.6 million in Q2, up $9 million or 44% compared with last year. New assets in Sweden and higher utilization rates are primarily responsible for the large increase.
Overall, the company is doing well in a difficult environment.
Inter Pipeline just announced plans to purchase NGL midstream assets from The Williams Companies for $1.35 billion. Pundits have mixed feelings about the move and the stock dropped on the news.
The deal is big and carries some risk, but Inter Pipeline is getting the infrastructure for 45% less than what Williams spent to build it.
The addition of the business should be a strong complement to the existing NGL extraction segment and could generate significant cash flow down the road once market prices improve.
Inter Pipeline expects the deal to be immediately accretive to FFO on a per-share basis.
Inter Pipeline pays a monthly dividend of $0.13 per share. The Q2 payout ratio was 70%, so the distribution looks safe. Once the Williams deal closes investors could see an increase to the payout.
The stock currently yields 5.7%.
Should you buy?
Inter Pipeline continues to generate solid results through the downturn in the oil industry. The dividend is sustainable, and investors should see some nice capital gains once the energy sector recovers.
If you have some cash to invest in a solid dividend pick, Inter Pipeline looks attractive right now.