Income Investors: Should Inter Pipeline Ltd. Be a Top TFSA Pick?

Inter Pipeline Ltd. (TSX:IPL) is performing well in a difficult market.

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Canadians are scouring the market for reliable yield to help them meet their monthly income needs.

Let’s take a look at Inter Pipeline Ltd. (TSX:IPL) to see why it might be an interesting choice for your portfolio.

Diversified assets

Inter Pipeline owns natural gas liquids (NGL) extraction facilities, oil sands infrastructure, conventional oil pipelines, and a liquids storage business located in Europe.

The diversified nature of the revenue stream has helped the company ride out the oil crash reasonably well, and management is investing in new opportunities while the market is still under pressure.

Inter Pipeline generated a 9% year-over-year gain in funds from operations (FFO) for Q2 2016.

The NGL segment enjoyed a nice rebound after a tough 2015, bringing in 31% more cash for a total haul of $31 million.

Oil sands transportation remains the largest revenue generator and also delivered better results. New assets put into operation last year bumped FFO up 5% to $141.4 million. Inter Pipeline’s oil sands contracts are with top companies that can ride out an extended downturn. Oil prices remain low, but throughput continues to be healthy.

Conventional oil producers have had a tough time, and the ones with weak balance sheets are really feeling the pain. Inter Pipeline’s core conventional oil focus in in the Viking play in Saskatchewan, which has held up well. The segment managed to deliver a slight gain in FFO in Q2 at $47.1 million compared to $46.5 million in the second quarter last year.

In Europe, Inter Pipeline is seeing strong demand for its storage facilities. Utilization rates rose to 97% in the quarter–up from 93% last year. This combined with the addition of new assets acquired in Sweden helped drive FFO in the division up 44% to $29.6 million.

Growth initiatives

Inter Pipeline believes better days are on the horizon for its NGL operations and has signed an agreement for $1.35 billion to acquire midstream assets from The Williams Companies. The deal includes two NGL extraction facilities and related infrastructure and could turn out to be a very profitable bet if market prices recover as expected.

The investment represents about 55% of the cost to actually build the assets, so Inter Pipeline is getting a good deal.


Inter Pipeline pays a monthly dividend of $0.13 per share. That’s good for a yield of 5.4% at the current stock price. Management raised the payout last November, and investors should see more increases in the near term once the new assets are integrated into the portfolio.

The Q2 2016 payout ratio was just 70%, so there is room for a boost even at current revenue levels.

Should you buy?

Inter Pipeline offers an oversized yield and an opportunity to pick up some nice capital gains once the energy sector recovers. More volatility could be in the cards if oil prices tank again, but this stock should be on your radar if you have a buy-and-hold investing style.

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 Andrew Walker has no position in any stocks mentioned.

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