Everyone knows the woes of Canada’s pipeline industry.
The dream of a game-changing link from Alberta’s oil fields to the U.S. Gulf Coast was wiped out by a stroke of Joe Biden’s pen as he killed Keystone XL on his first day in office. Energy East, which would have carried western oil to the Maritimes, was vetoed by implacable opposition from Quebec. Northern Gateway, Enbridge Inc.’s plan to link Alberta oil with tidewater in northern British Columbia, was derailed by an alliance of environmentalists and Indigenous communities.
Even long-established pipelines are under siege. The state of Michigan is trying to force Enbridge to close down Line 5, which runs beneath the Straits of Mackinac, because of oil spill concerns. The pipeline has been in operation since 1953.
Only two major new pipelines appear likely to be completed. One is the federally owned Trans-Mountain project, which twins an existing line between Edmonton and B.C.’s lower mainland. The other is Coastal GasLink, a natural gas line being built by TC Energy Corp. that links gas fields in northern B.C. to a new liquefied natural gas terminal in Kitimat. The problem is that costs have escalated by a whopping 70 per cent owing in part to opposition from some Indigenous leaders, which has led to lengthy delays.
With all these problems, you’d think the pipeline industry would be struggling to stay afloat. Not at all – in fact, it’s one of the best places for income investors to put their money these days. Pipeline companies offer a combination of stability, above average yields, and steady growth.
Enbridge, which recently reported third-quarter results, is currently paying a quarterly dividend of 86 cents a share ($3.44 a year) and that’s expected to rise by at least 5 per cent in February. The yield is 6.4 per cent.
TC Energy is paying 90 cents a quarter ($3.60 a year) to yield 5.7 per cent annually. It will likely raise its payout in the spring.
Pembina Pipeline Corp. recently boosted its monthly dividend by 3.5 per cent, to 21.75 cents ($2.61 annually) to yield 5.6 per cent. The company’s stock was under selling pressure earlier in the pandemic as investors were expecting a dividend cut. It never happened, as management vowed to protect the payout.
The price of these stocks has dropped in recent months in the face of rising interest rates. That’s to be expected: As yields on safe government bonds rise, higher-risk stock yields are pushed up to compensate, which translates into share price declines. Income investors should not be overly concerned by these market fluctuations but focus instead on the quality of their holdings and the stability of the dividends.
Here is an update on the pipeline picks in my Income Investor newsletter.
Enbridge Ltd.
- Ticker: ENB-T
- Current price: $53.45
- Annual payout: $3.44
- Yield: 6.4 per cent
- Risk: Moderate
Enbridge recently reported strong third-quarter results. Adjusted earnings were $1.4-billion (67 cents a share), compared with $1.2-billion (59 cents) in the same period of 2021. Adjusted earnings before interest, income taxes and depreciation and amortization (EBITDA) were $3.8-billion, up from $3.3-billion in 2021.
Cash provided by operating activities was $2.1-billion, compared with $2.3-billion in 2021. Distributable cash flow came in at $2.5-billion ($1.24 a share), compared with $2.3-billion ($1.13) last year.
How does Enbridge manage to grow its business in the face of all the anti-pipeline opposition? Acquisitions, a shift to green energy projects, and below-the-radar pipeline construction all play a role.
Recently, the company announced it has purchased U.S. renewable project developer Tri Global Energy, for US$270-million in cash and assumed debt plus up to US$50-million of contingent payments, based on the completion of projects now underway. Tri Global is the third-largest onshore wind developer in the United States, with a portfolio of wind and solar projects of more than seven gigawatts.
The company is also spending $3.6-billion on an expansion of the T-South section of the B.C. Pipeline System, which will increase capacity by 300 million cubic feet of gas a day.
Enbridge reaffirmed its 2022 financial guidance, which includes adjusted EBITDA between $15-billion and $15.6-billion and distributable cash flow per share between $5.20 and $5.50.
Pembina Pipeline Corp.
- Ticker: PPL-T
- Current price: $46.37
- Annual payout: $2.61
- Yield: 5.6 per cent
- Risk rating: Moderate
Pembina owns and operates an integrated system of pipelines that transport various products derived from natural gas and hydrocarbon liquids produced primarily in Western Canada. The company also owns and operates gas gathering and processing facilities and an oil and natural gas liquids infrastructure and logistics business.
Like Enbridge, Pembina had a strong third quarter. Revenue was almost $2.8-billion, up from $2.1-billion in the same period of 2021. Earnings were $1.8-billion ($3.23 a diluted share), compared with $588-million ($1.01) a year ago. However, it’s important to note that this year’s results included a $1.1-billion gain on the sale of assets related to the formation of Pembina Gas Infrastructure.
Pembina had previously announced it was merging its Western Canadian natural gas processing assets with KKR & Co. Inc. to create this new joint venture. The value of the combined entity will total $11.4-billion, of which PPL will own 60 per cent.
Adjusted third quarter EBITDA was $967-million, beating the consensus estimate of $883-million.
TC Energy Corp.
- Ticker: TRP-T
- Current price: $63.11
- Annual payout: $3.60
- Yield: 5.7 per cent
- Risk: Moderate
TC Energy owns and operates 93,300 kilometres of natural gas pipelines and 653 billion cubic feet of storage in Canada, the U.S., and Mexico. It also has a 4,900 km network of oil pipelines, which supply Alberta crude to the U.S. market. As well, TC Energy invests in several power generation facilities including wind, solar, and nuclear.
Third-quarter results showed net income attributable to common shares of $841-million (84 cents a share). That was modestly higher than the $779-million (80 cents) posted in the prior year.
For the first nine months of the 2022 fiscal year, TRP reported earnings of $2.1-billion ($2.11 a share), up from $697-million (72 cents) in 2021. The reason for the large disparity is that last year’s first quarter included a large write-off relating to the demise of the Keystone XL pipeline.
I recommend all three of these companies for income-oriented investors who are interested in steady cash flow and are willing to live with day-to-day price movements.
Gordon Pape is editor and publisher of the Internet Wealth Builder and Income Investor newsletters.
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