What are we looking for?
With investors starving for yield and energy-sector sentiment improving, my associate Allan Meyer and I thought it would be interesting to evaluate selected pipeline and midstream companies using our investment philosophy focused on safety and value. ("Midstream" companies are involved in the processing and transportation of crude and natural gas products.)
We started with Canadian-listed pipeline and midstream companies with a market capitalization of $1-billion or more, sorted from largest to smallest. We view market capitalization as a safety factor, as larger companies usually have more stable revenue streams and their shares tend to be more liquid.
Dividend yield is the annualized projected dividend per share divided by price per share. Our clients, Mr. Meyer and myself like to get paid while we wait for capital appreciation, and dividends generally reflect safety and stability.
Then we looked at leverage using debt/equity. It's a safety measure, a lower number is preferred.
Price to earnings is the share price divided by the projected earnings per share. It is a valuation metric – the lower the number, the better the value. Mr. Meyer and I like low price to earnings multiples – as value investors, we are always looking to get a deal.
Earnings momentum is the change in annualized earnings over the previous quarter. A positive number implies earnings are growing while the opposite is true for a negative number. Positive earnings momentum over the long term should translate to share price appreciation and dividend increases. The opposite is true for negative numbers.
EV/EBITDA is also known as the "takeover multiple." It is the enterprise value divided by earnings before interest, taxes, depreciation and amortization. A lower number reflects better value and takeover candidate potential.
We've included the average and median numbers to allow for better comparability among the list of names.
What did we find?
TransCanada Corp. looks interesting as it scores well on most safety and value factors while Kinder Morgan shows potential as a takeover candidate.
ETFs are an option for those who want to diversify away individual security risk. It's difficult to find an ETF that mimics our list, but Horizons Canadian Midstream Oil & Gas Index ETF (HOG-TSX) and BMO Equal Weight Oil & Gas Index ETF (ZEO-TSX) have some of the constituents.
Investors should contact an investment professional or conduct further research before buying any of the companies listed here.
Sean Pugliese, CFA, is an investment portfolio manager at Wickham Investment Counsel, helping individuals, families and other investors.
Select pipeline and midstream companies
|Company||Symbol||Market Cap. ($ Bil.)||Dividend yield (%)||Debt/Equity (%)||P/E||Earnings Momentum (%)||EV/EBITDA|
|Pembina Pipeline Corp.||PPL-T||17.8||4.6||50.0||21.5||0.8||18.6|
|Inter Pipeline Ltd.||IPL-T||9.8||6.2||182.1||17.8||-5.0||14.4|
|Enbridge Income Fund Holdings||ENF-T||4.7||6.4||0.0||13.6||0.0||16.7|
|Gibson Energy Inc.||GEI-T||2.5||7.4||128.6||71.3||283.3||13.9|
|Kinder Morgan Canada Ltd.||KML-T||1.8||0.0||78.4||27.4||0.0||7.5|
Source: Thomson Reuters, Wickham Investment Counsel Inc.
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