In the energy sector, pipeline stocks are among the favourite plays of income investors. And for good reason. The long-term contracts these energy infrastructure players provide a level of cash flow stability that’s hard to find today. And long-term investors like the defensiveness these essential infrastructure plays provide.
Pipeline stocks such as Pembina Pipeline (TSX:PPL)(NYSE:PBA) and TC Energy (TSX:TRP)(NYSE:TRP) are among the most-discussed players in Canada. Let’s take a look at why these stocks could be due for a nice ride from here.
Pipeline stocks poised for growth
Growth isn’t a word typically associated with pipeline plays. At least, not anymore. If anything, most proposed pipeline projects are likely to fail to get regulatory approval. Indeed, the world is shifting away from fossil fuels, and pipelines are on the out.
That said, it’s important to remember that we’re transitioning away from fossil fuels. Until we’re able to support the growing need for electricity via sustainable means, we’ll need pipelines. And expectations are that this need will span many more decades to come.
In the case of Pembina and TC Energy, these companies have teamed up on an interesting project. The two pipeline players are combining forced to work on a carbon transportation and sequestration system. This system will be set up in Alberta, close to the companies’ respective hubs.
Indeed, expectations are that this will become a key centrepiece of Alberta’s carbon storage and utilization plans. A variety of other projects including retrofitting existing pipelines and ensuring the safe transport of fuel across older channels will reduce the likelihood of spills. These projects are good for the environment and provide stability to oil markets.
Accordingly, both Pembina and TC Energy appear willing to move in the right direction. These projects should provide greater cash flow stability — a plus for long-term investors.
Both Pembina and TC Energy provide investors with an excellent mix of growth, income, and defensiveness today.
On the income front, Pembina and TC offer investors yields of 6.2% and 5.4%, respectively. These yields are substantial and are likely to make up a significant portion of these stocks’ respective returns over time.
From a growth standpoint, these pipeline players appear to be willing to make the investments necessary to drive cash flow growth over time. The recent partnership between these two pipeline players signals a cooperative shift in the sector. Indeed, that could turn out to be a good thing for investors with heavy sector-specific exposure.
Accordingly, both companies are great options for long-term investors today.
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 Chris MacDonald has no position in any stocks mentioned in this article. The Motley Fool recommends PEMBINA PIPELINE CORPORATION.