Riding the Canadian Pipeline Investment Wave

Canadian Pipelines a Good Investment?

Experts continue to believe that pipelines will continue to generate wealth for Canadian investors for the foreseeable future.  According to some investment experts, the most recent disputes relative to a Canadian pipeline would seem to confirm this position.  Despite Canada's pressing need for more pipelines, experts posit, pipeline project approvals seem to encounter "bottlenecks" early on in the approval process.  Owing to the difficulties is receiving requisite approvals, investment experts put forth the basic supply-demand laws, affirming that greater demand for pipelines that aren't being built, as they arguably should, means Canada's existing pipelines become much more valuable.  Investment experts also underscore the fact that pipeline assets cannot be disrupted by competition.  If Canadian pipelines are a safe bet according to investment experts, the next logical question to ask is, which pipeline to invest in?  Investment experts point to the three largest pipelines (in no other order than alphabetically): Enbridge, Inc. (TSX: ENB)(NYSE: ENB), Inter Pipeline Ltd. (TSK: IPL), and TC Energy (TSX: TRP). 

Which Pipeline Do Expert Investors Recommend?

Enbridge Pipelines as an Investment?

Both TC Energy and Enbridge are said to offer much more diverse portfolios.  Focusing first on Enbridge, Enbridge is said to be recognized first for its oil pipeline portfolio, second for its natural gas assets. As well, Enbridge also owns Ontario's largest natural gas utility, which provides predictable income and a wind power generation subsidiary. 

TC Energy as an Investment?

With respect to TC Energy, in addition to the fact that it has further diversified into power generation, investment experts stipulate that natural gas pipelines weigh in stronger.  For instance, its Bruce Energy subsidiary generates an annual estimate of 6,600mWh of nuclear energy. 

Inter Pipeline?

Nelson Smith explains that investors looking for a pure play on growth in the oil sands should bet on high on Inter pipeline shares. Nearly 50% of Inter Pipeline is said to be generated from three pipelines that transport bitumen to refineries, with plenty of room for excess capacity when oil sands production expands. In addition, Inter Pipeline is also said to own energy storage assets, and various conventional oil and natural gas pipelines. 

Synthesis

Which of the above three energy companies ranks first?  Investment expert Nelson Smith from Motley Fool ranks Enbridge and TC Energy as the winners in this particular category.  As he affirms, "you have to like the stability of owning utility assets".

Canadian Pipeline Investment: Future Potential Growth?

TC Energy Pipeline Growth Projects

TC energy is well positioned in terms of growth potential. As of the date of this writing (Sunday, May 19, 2019),  TC Energy has some $30 billion worth of expansion projects planned for the course of the next five (5) years, the largest of which is the $6.2 billion Coastal Gas Link project that is, a natural gas pipeline to be extended to the LNG terminal in Kitimat, British Columbia (B.C.).

Enbridge Line 3 Pipeline Project

Some investment experts opine that the two largest pipeline companies in Canada still have plenty of expansion potential, despite running into several brick walls on some of their proposed national pipeline projects.  For instance, one of the most important pipelines in Canada is the Line 3 pipeline owned by Enbridge, which is used to transport crude oil from Canada into the U.S. Enbridge is in the process of expanding $5.9 billion towards replacing part of its Line 3 pipeline as well as US$2.9 billion to replace the portion of the pipeline within U.S. territory.

Inter Pipeline

Inter Pipeline is in the process of expanding $3.5 billion towards a growth path that is projected to add some $500 million to the company's EBITDA once completed in 2021.  The project in question, labeled the Heartland Petrochemical Complex, is a propane dehydrogenation and polypropylene facility.

Canadian Pipeline Company Valuations

Inter Pipeline reports its valuation from operations, which results in a valuation of $2.80 per share.  Relying on reported distributable cash flow as its preferred valuation metric, Enbridge reported $4.42 per share in 2018, putting shares at approximately 11 times that figure today.  Finally, TC Energy reported distributable cash flow of $6.52 per share, putting shares at just under 10 times trailing cash flow. 

Canadian Pipeline Company Dividends

Enbridge offers the higher current yield today, with a payout of 5.9%.  TC's dividends is still an attractive 4.6%, and Inter Pipeline offers its investors an 8.1% yield today with steady dividend growth annually since 2009.  In addition, Inter Pipeline has a low payout ratio, which is approximately 60% of funds from operations.  In the short term, some expert advisors caution against expectations that Inter Pipeline will grow its dividends by more than 3-5% annually in the short term, the reason being it requires capital for the above-discussed Heartland project. 

Concluding Remarks

In terms of which of these companies investors should give preference to, experts seem to favor an inclusive and diversified investment strategy vis-a-vis Canadian pipeline companies, expressing a preference for holding shares in all three (3) Canadian pipeline companies. 

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