Buy land. They’re not making any more of it.
The same might be said for oil pipelines, especially big projects. Every major oil pipeline proposal in recent years has been blocked, except for Trans Mountain – and that’s only going ahead in the face of fierce opposition because the government of Canada owns it.
Northern Gateway, Energy East, Keystone XL – all are now tombstones in the growing pipeline cemetery.
Even replacement lines face fierce pushback from environmentalists. Michigan wants to shut down Enbridge’s Line 5, which transports 540,000 barrels a day of light crude and natural gas liquids to Ontario, Quebec, Michigan and Ohio from the West. Why? Because the line passes under the Straits of Mackinac and there are concerns a major rupture would pollute the Great Lakes. That’s a possibility, but a slim one. Line 5 has been operating since 1953 without a single leak within that section (although there have been some elsewhere in the system). Enbridge also plans to invest $500-million to build a tunnel that will encase and further protect the line.
Enbridge’s replacement Line 3, which runs to Superior, Wisc., from Edmonton has also faced legal challenges and protests every step of the way, even though the original line has been operating since the 1960s.
All this opposition makes existing pipelines that much more valuable, which explains why Brookfield Infrastructure Partners LP has fought hard to gain control of Inter Pipeline Ltd. Shareholders have so far failed to ratify the deal but it’s expected to go through.
Any oil pipelines being built today in Canada are mostly small, under-the-radar ventures compared with the multibillion-dollar cancelled projects.
Like the dinosaurs, the pipeline industry may eventually be doomed, at least as conduits of hydrocarbons. But that’s a long way in the future.
For now, the industry is reporting decent profits and offers attractive yields for investors. Let’s look at three companies.
TC Energy Inc. (TRP-T)
Background: TC Energy is one of North America’s major pipeline companies, with 92,600 kilometres of natural gas pipelines and 4,900 km of oil pipelines. It also owns or has interests in 10 power-generation facilities with combined capacity of approximately 6,000 megawatts.
Performance: The stock hit a year-to-date high of almost $65 in June, but has pulled back since. However, it is still ahead by about 20 per cent so far this year.
Recent developments: The company reported a drop in second-quarter net income per share to $1 from $1.36, but excluding certain items “not reflective of our underlying operations,” it reported earnings of $1-billion ($1.07 a share) compared with $863-million (92 cents) in 2020. The company said per-share results reflect the impact of common shares issued for the acquisition of TC PipeLines LP in the first quarter of 2021.
Pipeline news: The company’s major Canadian project is Coastal GasLink in British Columbia. Work was suspended over the winter because of COVID-related restrictions, but has now resumed. However, the company anticipates that the delays and disputes with LNG Canada will increase costs, which in turn will drive up the prices charged to end users. There are also several projects in the U.S. and Mexico in various stages of development.
Dividend: The stock pays a quarterly dividend of 87 cents a share ($3.48 a year) to yield 5.7 per cent at the current price.
Outlook: The company has a $21-billion secured capital program under way and has assets to invest in new opportunities.
Enbridge Ltd. (ENB-T)
Background: Enbridge Inc. is one of the largest energy infrastructure companies in North America. It operates an extensive network of crude oil, liquids and natural gas pipelines, and is also involved in regulated natural gas distribution utilities and renewable power generation.
Performance: It’s a choppy chart, but the stock has gradually been moving higher this year and recently briefly topped $50. The stock is ahead about 25 per cent in 2021.
Recent developments: Enbridge reported a decent second quarter. Generally accepted accounting principles, or GAAP, earnings attributable to common shareholders were about $1.4-billion (69 cents a share), down from $1.6 billion (82 cents) in the same period last year. The company said the period-over-period comparability of GAAP earnings was affected by certain “unusual, infrequent factors or other non-operating factors.”
Adjusted earnings were up, coming in at $1.4-billion (67 cents), compared with $1.1-billion (56 cents) last year. Cash provided by operating activities was $2.2-billion, compared with $2.4 billion in 2020. Distributable cash flow, or DCF, was $2.5-billion ($1.24), compared with $2.4-billion ($1.21).
Enbridge reaffirmed 2021 full-year guidance range of earnings before interest, taxes, depreciation and amortization, or EBITDA, of $13.9-billion to $14.3-billion and DCF per share of $4.70 to $5.
Pipeline news: While the future of Line 5 remains in court-ordered mediation, the company says work is proceeding on finishing the last leg of Line 3 replacement and expects it to be in service in the fourth quarter.
Enbridge is also working on two new pipelines within British Columbia, the $1-billion T-South Reliability and Expansion Program and $500-million Spruce Ridge Program. Combined, these two projects will increase the capacity of the B.C. pipeline system by approximately 590 million cubic feet a day to meet growing regional demand in the province and the U.S. Pacific Northwest through a combination of compressor station upgrades and the addition of two new pipeline segments.
Dividend: The stock pays a quarterly dividend of 83.5 cents a share ($3.34 a year) to yield 6.7 per cent at the current price.
Outlook: “Our performance in the first half of 2021 has set us up well for the full year,” chief executive officer Al Monaco said. “We’re on track to bring $10-billion of projects into service this year and we’re reaffirming our full-year 2021 financial guidance. Our secured growth execution and embedded asset growth gives us confidence that we’ll generate 5-7 per cent distributable cash flow growth through 2023.”
Pembina Pipeline Corp. (PPL-T)
Background: Pembina owns pipelines that transport hydrocarbon liquids and natural gas products produced primarily in Western Canada. It also owns gas gathering and processing facilities and an oil and natural gas liquids infrastructure and logistics business.
Performance: Again, it’s a choppy chart, but the trend line this year is up and the shares are trading at close to their 52-week high. The shares have gained more than 35 per cent this year.
Recent developments: Second-quarter results released last week showed a year-over-year increase in revenue but a slight drop in profit.
The company said volumes across Pembina’s pipeline systems and facilities continued to rise, reflecting the impact of higher commodity prices and strong Western Canadian Sedimentary Basin fundamentals.
Earnings were almost flat from a year ago. The company reported second-quarter profit of $254-million (39 cents) compared with $258-million (40 cents) last year.
Pipeline news: The headline story this year is the collapse of the friendly takeover deal with Inter Pipeline in the face of an aggressive hostile takeover bid by Brookfield Infrastructure Partners. The Brookfield takeover has yet to be approved by Inter shareholders, but assuming it is, Pembina will walk away from the deal with a break fee of $350-million.
And the company is still forging ahead on other fronts. So far this year, it has placed more than $400-million worth of new projects into service. It has also restarted work on reactivating the previously deferred Phase IX of the Peace Pipeline expansion, which will add capacity in northwest Alberta to the Gordondale, Alta., corridor to accommodate increased activity in the Montney play. The cost is $120-million.
Dividend: Despite fears of a cut, Pembina has kept its monthly dividend at 21 cents throughout the pandemic. At $2.52 a year, the stock was yielding a lofty 9.5 per cent in early March, 2020. The increase in the share price has cut that back to 6.3 per cent, but that’s still attractive.
Outlook: The company updated its 2021 adjusted EBITDA guidance range by raising the low end. Adjusted EBITDA is now expected to be $3.3-billion to $3.4-billion.
All three companies are in good financial shape and offer above-average yields. If you’re not averse to owning shares in a pipeline business and are looking for cash flow, check them out.
Gordon Pape is editor and publisher of the Internet Wealth Builder and Income Investor newsletters.
Editor’s note: In an earlier version of this article, the quarterly dividend for Enbridge was incorrectly stated. It has been updated.
Be smart with your money. Get the latest investing insights delivered right to your inbox three times a week, with the Globe Investor newsletter. Sign up today.