In 2007, Inter Pipeline acquired the Corridor pipeline system (seen here in a photo taken by previous owner Kinder Morgan while it was being built). It has committed to completing a $1.8-billion expansion of the pipeline system by 2010.
One good idea Inter Pipeline Fund
The source Peter Brieger, chief executive officer and managing director of Toronto-based GlobeInvest Capital Management
The idea Buy units of Inter Pipeline Fund
Who's it for Inter Pipeline Fund, a Calgary-based limited partnership, will appeal to investors who want "income and reasonably conservative growth," says Mr. Brieger. The units pay a monthly distribution of 7 cents for a current yield of 9 per cent, and have a potential for capital-gains appreciation from exposure to expanding areas in the energy-infrastructure industry (PROFIT Magazine recently rated the partnership the 57th fastest growing company in Canada over the past five years).
The distribution is well supported by the partnership's cash flow, which is derived mostly from regulated sources and long-term contracts with creditworthy customers. These stable and secure sources of cash flow also provide substantial immunity to the economic cycle, which may be of interest to defensive investors and those uncertain of "the longevity of any economic recovery."
What exactly does Inter Pipeline do? Inter Pipeline has "four key operating segments: conventional oil pipelines (32 per cent of cash flow), extraction of liquids from natural gas (30 per cent), oil-sands transportation (24 per cent), and bulk-liquid storage (14 per cent)." It operates in western Canada and Europe.
Why it's a good idea Management "expects the fastest growth from the oil-sands transportation business, which should be about 53 per cent of total cash flow by 2011. Inter Pipeline can double the capacities for its Cold Lake and Corridor oil-sands pipelines by 2015 with only modest additional capex [capital expenditures] thus providing strong positive leverage for the cash flow from that segment of the business," Mr. Brieger says.
"Its conventional pipeline business … represents 17 per cent of Western Canadian conventional volumes; while management estimates a long-term 4-per-cent decline rate in volumes, that decline is offset by rising tariffs - thus providing long-term stability to this segment of the business," he adds.
"Its bulk-liquid storage business is located mainly in the U.K. and Germany; at a current 97-per-cent capacity utilization rate, one can expect further additions and growth."
The natural-gas liquids division extracts ethane, propane, butane and other liquids from natural gas. It currently processes about 40 per cent of natural gas exported from Alberta. "This business can be expanded with only modest capex additions," Mr. Brieger believes.
At the macro-level, Inter Pipeline faces a "favourable five-year outlook for oil prices." Demand is rising thanks to the industrialization of China and other emerging economies, while supply remains tight.
Expected return "With a current, sustainable yield near 9 per cent and our target one-year capital gain of about 8 per cent, GlobeInvest Capital thinks a one-year target total return of 17 per cent will prove to be attractive to a large segment of the investing public," Mr. Brieger estimates. And there is a high "probability of reaching the target total return [considering]target income exceeds 50 per cent of the target total return."
Some of the risks Inter Pipeline is scheduled to become taxable as a corporation in 2011, which poses the risk of reduced distributions. However, Mr. Brieger feels "the distributions can be sustained post 2011 as the incremental cash flow from the oil-sands pipelines will more than cover any future taxes."
The natural-gas liquid extraction division is sensitive to price differentials between natural-gas prices and the prices at which the liquids can be sold (i.e. 'frac' spreads). Nevertheless, the average spread in the market is currently well above the "15-year average spread of about 31.7 cents (U.S.)."
Another possible risk is that tariff increases may not keep pace with inflation (if it accelerates) or with declines in shipments of oil from Alberta.
Why listen to Mr. Brieger Mr. Brieger has spent more than 45 years in the investment business as a research analyst, market strategist, and portfolio manager. He founded portfolio-management firm GlobeInvest Capital Management in 1988, is a Chartered Financial Analyst (CFA), and regularly appears as a guest on Business News Network (BNN).