Last week, shares of Inter Pipeline Ltd. (TSX:IPL) hit a new 52-week low at a price of $25.38. While the entire oil industry has suffered considerably over the past few years, shares of this pipeline company have only been affected in a minor way.
Currently trading above the $25 mark, shares of the company now offer new investors a dividend yield of over 6.25% in addition to the potential for capital appreciation. At the current price, shares are priced at a trailing price-to-earnings multiple (P/E) close to 18 times. For a relatively defensive business, this price may be considered very cheap.
As Inter Pipeline operates pipelines which transport oil, the biggest risk is that less oil will be purchased from the Canadian oil sands, which would translate to a drop in revenues. The good news, however, is that we are far from that point. In early 2016, the fears were overblown and investors sold out of the stock, causing a drop in the share price to a number near the $20 mark. Although Inter Pipeline went down with the oil industry as a whole, the truth is that the revenues of the company are based on the transportation of oil and not the price per barrel of oil. For investors wanting exposure to the oil sector without taking excess risk, this investment could present a fantastic opportunity.
There has been a consistent increase in revenues since fiscal 2013. Revenues in 2013 totaled $1,362 million, which grew to $1,824 in fiscal 2016. The compounded annual growth rate (CAGR) of revenues was 10.2% over this period. Earnings per share fared much better, increasing at a rate of 30% per year. Given the long-term nature of the company’s assets, we must also consider cash flows from operations, which increased at a CAGR of 19.8%. Clearly, the underlying operations of the business have performed very well.
Looking at the dividends paid to shareholders, the $1.16 annual dividend in 2013 has grown to $1.56 in fiscal 2016. The CAGR of the dividend is nothing short of 10.3%. Investors have received a raise in each year since 2013, and for the majority of long-term holders, there has also been capital appreciation. Things have been very good for investors of Inter Pipeline.
Going forward, the market is clearly pricing in a decrease in revenues for the company due to the lower oil prices. With increases in revenues for the first quarter of fiscal 2017 (in comparison to the same quarter last year), this security may be undervalued at a current price near $25.
Moving forward, it is essential for investors to differentiate between the producers of oil and the transporters of the product. In a business with high barriers to entry and a captive audience, investors may need to strongly consider shares of Inter Pipeline for their portfolios.
