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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.”

The screen

We started with Canadian-listed pipeline and midstream companies with a market cap of $400-million or more, sorted from largest to smallest. (As the name implies, “midstream” companies link the upstream – exploration and production – and downstream – refining and marketing – aspects of the energy industry; companies involved in oil and gas transportation and storage are considered midstream.)

Dividend yield is the annualized projected dividend per share divided by share price. We and our clients love dividends. We compare dividend-paying stocks with a rental property: You buy the property for price appreciation over time, but you also collect rent or income along the way, much like buying a stock that pays dividends.

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Then we looked at leverage using debt-to-equity as another safety measure, a lower number is preferred. A ratio of 100 or less indicates a company has enough equity to pay off its debt obligations.

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. Allan and I like low P/E multiples; as value investors, we are always looking to buy when a stock is inexpensive.

Earnings momentum is the change in annualized earnings over the past quarter. The higher the number, the better the earnings growth. Positive earnings momentum over the long term should translate to share price appreciation and dividend increases. The opposite is true for negative momentum.

EV/EBITDA is also known as the “takeover multiple.” It is the enterprise value divided by earnings before interest, taxes, depreciation and amortization. Again, a lower number reflects better value and takeover-candidate potential.

We’ve included the group’s average and median numbers to allow for better comparability, as well as the 52-week total return to track performance.

What we found

Enbridge Income Fund Holdings Inc. and Tidewater Midstream and Infrastructure Ltd. look interesting, as they score well on most safety and value factors. Kinder Morgan Canada Ltd., Tidewater and Inter Pipeline Ltd. show potential as takeover candidates. AltaGas Ltd. is the highest yielding on the list. Exchange-traded funds are an option for those who want to diversify away individual security risk. Horizons Canadian Midstream Oil & Gas Index ETF (HOG-TSX) may be one to look at.

Select TSX-listed pipeline and midstream companies

CompanyTickerMarket Cap. ($Bil)Recent Price ($)Div. Yield (%)Debt/Equity (%)P/EEarns Momentum (%)EV/EBITDA52 Wk Total Return
Enbridge Inc.ENB-T72.042.256.4112.117.612.816.6-19.6
TransCanada Corp.TRP-T49.855.854.9173.816.65.514.8-8.0
Pembina Pipeline Corp.PPL-T22.143.995.254.817.96.017.96.0
Inter Pipeline Ltd.IPL-T9.023.537.1156.915.9-0.712.4-7.8
Keyera Corp.KEY-T7.335.504.774.520.1-5.614.2-7.2
Enbridge Income Fund Holdings Inc.ENF-T4.927.938.10.011.54.715.6-9.3
AltaGas Ltd.ALA-T4.525.368.680.322.80.814.8-11.0
Gibson Energy Inc.GEI-T2.517.127.7132.7188.5-17.217.80.9
Kinder Morgan Canada Ltd.KML-T1.716.563.90.027.00.012.05.3
Tidewater Midstream and Infrastructure Ltd.TWM-T0.41.382.941.215.20.010.72.9
Average6.082.635.30.614.7-4.8
Median5.877.417.80.414.8-7.5

Source: Thomson Reuters, Wickham Investment Counsel Inc.

Investors should contact an investment professional or conduct further research before buying any of the companies listed here.

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Sean Pugliese, CFA, is an investment portfolio manager at Wickham Investment Counsel, helping individuals, families and other investors.

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