Inter Pipeline Ltd.: Should You Buy the Pullback?

Inter Pipeline Ltd. (TSX:IPL) just dropped more than 3%. Is this high-yield stock a buy?

The Motley Fool

Inter Pipeline Ltd. (TSX:IPL) fell more than 3% after releasing its Q3 2017 earnings report.

Let’s take a look at the current situation to see if the dip is an opportunity to buy the stock.

Financials

IPL reported record funds from operations (FFO) of $269 million for Q3 2017, or $0.72 per share, representing a 27% increase over the same period last year. Net income also hit a record, coming in at $143 million, or 17% higher than Q3 2016.

IPL operates oil sands pipelines, conventional oil pipelines, natural gas liquids (NGL) extraction assets, and a liquids storage business in Europe.

The oil sands transportation business saw FFO jump 13% year over year, hitting $160.6 million as average throughput rose 5% to 1.15 million barrels per day (b/d) due to increased volumes from all of the company’s contracted shippers.

Conventional oil throughput increased 10% to 212,000 b/d, resulting in record FFO of $54.5 million. Stronger drilling activity and increased light oil production in the Viking formation contributed to the gains.

The bulk liquids storage operations in Europe had a weaker year-over-year quarter. Utilization rates slipped from 98% in Q3 2016 to 95%, and FFO came in at $25.2 million compared to $30.2 million last year.

NGL processing generated FFO of $78.1 million in the quarter, up substantially from $28.7 million in the same period in 2016. The off-gas processing business purchased last year from The Williams Companies contributed $41.7 million in FFO for the quarter. The new assets only had eight days of contribution in Q3 2016.

Overall, IPL had a solid quarter.

Why did the stock fall?

On the surface, the numbers looked pretty good, but investors dumped the stock after the Q3 report came out.

What’s the scoop?

IPL didn’t announce a dividend increase, despite the Q3 payout ratio coming in at 56.6%. The company has raised the distribution in each of the past three years, so investors might be disappointed IPL didn’t announce a plan to hand over more cash.

In addition, IPL is evaluating $3.1 billion in new capital projects. The company is still in negotiations with potential counterparties for long-term contracts on the new NGL facilities that would include propane dehydrogenation and polypropylene plants.

The market might have expected a positive announcement on the project in the Q3 report. IPL plans to make a decision by the end of 2017, and operations are expected to begin in the second half of 2021 if the development gets the green light.

Should you buy?

Rising oil prices bode well for throughput on IPL’s pipeline assets, as producers ramp up drilling activity to take advantage of the higher margins.

In addition, a positive decision on the NGL capital program would likely provide a nice boost to cash flow in the medium term.

The existing monthly dividend provides an annualized yield of 6.2%, so investors are already getting a decent yield. If you have some cash sitting on the sidelines, it might be worthwhile to add a bit of IPL to your income portfolio.

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 Andrew Walker has no position in any stock mentioned.

More on Energy Stocks

engineer at wind farm
Energy Stocks

Invest $20,000 in This Dividend Stock for $100 in Monthly Passive Income

This dividend stock has it all – a strong outlook, monthly income, and even more to consider buying today.

Read more »

A worker overlooks an oil refinery plant.
Energy Stocks

Is Imperial Oil Stock a Buy, Sell, or Hold for 2025?

Valued at a market cap of $55 billion, Imperial Oil pays shareholders a growing dividend yield of 2.4%. Is the…

Read more »

Pumpjack in Alberta Canada
Energy Stocks

Where Will Imperial Oil Stock Be in 1 Year?

Imperial Oil is a TSX energy stock that has delivered market-thumping returns to shareholders over the last two decades.

Read more »

Pumpjack in Alberta Canada
Energy Stocks

1 Magnificent Energy Stock Down 17% to Buy and Hold Forever

Down over 17% from all-time highs, Headwater Exploration is a TSX energy stock that offers you a tasty dividend yield…

Read more »

Pumpjack in Alberta Canada
Energy Stocks

Is Cenovus Energy Stock a Good Buy?

Cenovus Energy (TSX:CVE) stock is primed for capital gains and strong total returns in 2025, driven by strategic buybacks and…

Read more »

Trans Alaska Pipeline with Autumn Colors
Energy Stocks

2 High-Yield Dividend Stocks That are Screaming Buys Right Now

Natural gas stocks like Peyto Exploration and Development are yielding above 7% today and look undervalued as natural gas strengthens.

Read more »

chart reflected in eyeglass lenses
Energy Stocks

Best Stock to Buy Right Now: Canadian Natural Resources vs Cenovus?

Want to invest in Canadian energy? Canadian Natural Resources and Cenovus Energy are two of the largest, but which one…

Read more »

oil pump jack under night sky
Energy Stocks

Where Will Cenovus Stock Be in 1/3/5 Years? 

Let's dive into whether Cenovus (TSX:CVE) stock is worth buying right now and where this stock could be headed over…

Read more »