Inter Pipeline Thrives Out of Keystone Spotlight

For Canadian oil-sands pipeline companies, operating under the radar pays.

Inter Pipeline Ltd. is leading shareholder gains among Canadian peers as it operates within the oil-friendly provinces of Alberta and Saskatchewan, avoiding the environmental controversies that have dogged projects from larger competitors such as TransCanada Corp.’s Keystone XL. Pembina Pipeline Corp., with a focus on Western Canada, hit a record high yesterday.

“Inter Pipeline has been an untold story for a long time,” Steven Paget, an analyst at FirstEnergy Capital Corp. in Calgary who rates the stock the equivalent of hold, said by phone. “It has a great order book and is possibly adding a lot more to that order book.”

The company is profiting from growing demand for shipments of oil-sands crude to nearby hubs as producers from Imperial Oil Ltd. to Suncor Energy Inc. invest more than C$20 billion ($18 billion) a year to tap the world’s third-largest reserves. The Calgary-based pipeline operator transports about 40 percent of all oil-sands output.

About C$3 billion of potential contracts in coming years mean business is set to keep growing, Paget said.

Inter Pipeline has surged 39 percent this year in Toronto. That’s the most among the five largest Canadian pipeline operators, data compiled by Bloomberg show, and almost double the 20 percent delivered by TransCanada, whose signature Keystone XL project faces mounting opposition and approval delays in the U.S.

The company is worth C$11.6 billion based on today’s stock price, less than a third the market value of TransCanada. The shares dropped 0.5 percent to C$35.82 at the close in Toronto.

Filling In

Shares of Calgary-based Pembina closed at a record C$49.73 and have advanced 33 percent this year.

Inter Pipeline has filled in links between oil-sands production sites and transportation hubs like Edmonton and Hardisty in Alberta through 2,600 kilometers (1,616 miles) of pipes, while another 3,700 kilometers connect conventional oil fields in Alberta and Saskatchewan with main lines. It also has 3.8 million barrels of storage capacity.

Its shipments of bitumen and diluent rose 11 percent from a year earlier in the second quarter, reaching 858,000 barrels a day, a bigger volume than Qatar’s crude output.

The pipeline operator plans to expand its Cold Lake and Polaris systems as well as to increase its Mid-Saskatchewan network.

Output Outlook

“They have a core backbone of pipe for oil-sands production and diluent that has allowed them to grow dramatically over the past several years,” said Jennifer Stevenson, who helps manage about C$100 billion in assets at Dynamic Funds, a unit of Toronto-based DundeeWealth Inc. “The energy infrastructure space in general continues to have a strong long-term growth outlook with sustainable and growing dividends.”

Inter Pipeline has no plans to expand its network with big “multi-billion dollar” cross-border projects like Keystone XL or Northern Gateway, said Tony Mate, a company spokesman.

“We think we’re fairly well positioned going forward,” said Mate in a phone interview. “Our cash flow is going to grow and become more stable.” The company expects most of its growth to come from expansion of the oil sands and that its market share is “defensible,” he said.

Pembina Pipeline’s investor relations department wasn’t immediately available yesterday to comment.

Canadian oil production is set to increase 4 percent a year on average to 6.4 million barrels a day in 2030 from 3.5 million last year, according to a June 9 forecast by the Canadian Association of Petroleum Producers.

Less Growth

Inter Pipeline, which also owns storage facilities in Europe and natural gas liquids extraction plants, was originally created in 1997 as a fund and converted to a dividend-paying corporation a year ago, allowing some foreign investors to become shareholders.

It posted second-quarter net income attributable to shareholders of C$81.7 million on Aug. 7, compared with a C$283.9 million loss a year earlier. Full-year net income excluding one-time items will reach about C$372 million, compared with a loss of C$58.1 million last year, according to seven analysts’ estimates compiled by Bloomberg. Revenue is forecast to rise 19 percent to C$1.63 billion.

Some analysts see Inter Pipeline’s pace of growth slowing in the coming year.

“With an enterprise value of over C$16 billion, we believe it will be tough for Inter Pipeline to maintain its existing level of growth,” Robert Hope, an analyst at Macquarie Capital Markets Canada, said in an Aug. 22 note.

Oil Prices

The pipeline company will likely complete its large oil-sands trunk line projects this year, resulting in a “significant step down” in 2015 and 2016 capital expenditures, Hope said in the note.

Still, with prices for the West Texas Intermediate crude benchmark remaining close to $100 a barrel, the company’s services will probably be in demand in step with continued production gains.

“We continue to like the stock, which we see as standing out from its peers due to a consistent track record of being able to secure trunk-line expansions at reasonable returns,” said Robert Kwan, an analyst with Royal Bank of Canada’s RBC Dominion Securities Inc. in Vancouver, in an Aug. 8 note.

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