The energy sector is starting to see some action, or at least some serious tire kicking, on companies that have attractive assets but are trading at potentially oversold prices.
In recent trading, Inter Pipeline (TSX:IPL) saw its share price rally nearly 15% from just under $22 to above $25 per share after a report came out in one of the business newspapers that the company had turned down an offer of $30 per share.
As the rumour spread that the stock had to be halted, IPL eventually confirmed it had been approached about the possible sale of the company — though was not in negotiations to sell the business. Investors obviously believe that something might still develop; at the time of writing, the stock is trading just under $25.
Opportunity
IPL owns oil sands and conventional oil pipelines as well as natural gas liquid extraction facilities in Canada. In Europe, the company owns a bulk liquids storage business with assets located in a number of countries.
The stock traded as high as $38 per share five years ago and bottomed out around $19 last December. Pain in the oil patch is broadly responsible for the rough run, but investors have also become concerned about the debt the company has to take on to complete its $3.5 billion Heartland Petrochemical Complex.
The facility will produce polypropylene and is targeted for completion in late 2021. When it goes into operation, IPL expects to see a boost in annual EBITDA of $450-500 million.
The company has also made tuck-in acquisitions and is expanding part of its existing pipeline infrastructure.
IPL just announced it is exploring the sale of its bulk liquid business to help fund the Heartland project. Based on the net book value of $1.2 billion, the assets could fetch enough to cover a third of the cost of the development.
The decision to sell the division is a bit of a surprise to some followers of the stock as IPL recently made acquisitions to boost the size of the European business, but it appears that was part of a strategy to put together a more appealing package.
Dividends
IPL has raised the dividend every year for the past decade. The current payout provides a yield of 6.9%. Funds from operations slipped in Q2 2019 compared to the same period last year due to weak market prices that impacted the gas processing group. The results from the segment can vary widely from year to year.
Overall, the payout ratio was 73% in the quarter, so the distribution should be safe.
Could IPL sell for $30?
IPL continues to generate solid results, and now that the cat is out of the bag on the potential for a takeover, the stock should have a floor around the current price.
A bid at or above $30 wouldn’t be a surprise, and if interest heats up, investors could even see a deal emerge in the $35 range.
In the meantime, you can pick up an attractive yield and wait to see how things pan out.
With the company seeking to fund a big chunk of the Heartland project through the sale of the storage business, balance sheet concerns should fade, which might provide additional upward momentum for the stock, even if it remains independent.
