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We’re finally seeing some significant upward movement in the pipeline sector after two years in the doldrums.
Enbridge, TC Energy, and Pembina Pipeline are all trading near their 52-week highs, thanks to good financial results and an improving interest rate environment.
Because these are capital-intensive companies, they are highly sensitive to movements in interest-rate. All were hard-hit by the rapid rise in rates in 2022-23 as central banks fought to tame high inflation. But now it’s a new ball game. The Bank of Canada has already cut twice, and the U.S. Federal Reserve Board is widely expected to move at its September meeting now that U.S. inflation has fallen to 2.9%.
Unless there is a recession, rates won’t fall as quickly as they rose and are unlikely to settle anywhere near the lows we saw back in 2020-21. But any downward shift is a plus for pipeline stocks and for other interest-sensitive securities like utilities and REITs.
Here are updates on pipeline stocks I track in my Internet Wealth Builder newsletter for growth potential and in my Income Investor newsletter for solid high yields.
Enbridge Ltd. (TSX: ENB) 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. After a dip in April, the shares have been moving higher and recently touched a 52-week high of $55.40. The stock pays a quarterly dividend of $0.915 per share ($3.68 a year) to yield 6.6% at the recent price.
The company reported a strong second quarter, beating consensus estimates for distributable cash flow (DCF) and adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA). Earnings attributable to shareholders came in at $1.8 billion, the same as in 2023. But on a per-share basis, they dropped a nickel, to $0.86, due to the issuing of new common shares. Adjusted earnings decreased by $132 million, or $0.10 per share, compared with the same period in 2023. This was primarily the result of higher financing costs due to rising interest rates and long-term debt principal.
Distributable cash flow was $2.9 billion, up from $2.8 billion in the same period last year. Adjusted EBITDA was $4.3 billion compared with just over $4 billion a year ago.
The company recast its 2024 financial guidance. Adjusted EBITDA is expected to be between $17.7 billion and $18.3 billion (previously $16.6 billion to $17.2 billion). This adds incremental contributions from the two U.S. gas acquisitions that have closed and assumes a third quarter closing for the third. The company maintained its DCF per share guidance range of $5.40 to $5.80.
TC Energy Corp. (TSX: TRP) is one of North America’s major pipeline companies, with 93,300 km of natural gas pipelines and 4,900 km of oil pipelines. It also owns or has interests in seven power generation facilities with combined capacity of approximately 4,300 megawatts. The stock has been climbing steadily since early July, having gained over 17% in that period. The stock pays $0.96 per quarter ($3.84 per year) to yield 6.0% at the recent price.
The company beat estimates by posting second-quarter earnings attributable to common shareholders of $963 million ($0.93 per share), compared with $250 million ($0.24 a share) last year. For the first six months of the fiscal year, net income was $2.2 billion ($2.09 per share) compared with $1.6 billion ($1.53 per share) in 2023. Comparable EBITDA for the quarter was $2.7 billion, up from $2.5 billion in the year-ago period.
Shareholders have approved a plan to spin off the company’s liquid pipelines business into a separate, publicly-traded corporation. More details on the terms of the arrangement are expected soon.
TRP also announced approximately $2.6 billion of divestitures as part of its $3 billion asset divestiture program. It included Canada’s largest Indigenous equity ownership agreement that will enable Indigenous Communities to acquire a 5.34% minority interest in NGTL and Foothills Systems for gross proceeds of $1 billion.
The company reaffirmed its projections for the year. Comparable EBITDA is expected to be $11.2 to $11.5 billion. Comparable earnings per share are expected to be lower than 2023 due to the net impact of higher net income attributable to non-controlling interests. The company anticipated capital expenditures to be at the low end of the $8.0-$8.5 billion range.
Pembina Pipeline Corp. (TSX: PPL). The Calgary-based company 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. The stock is up about 15% year-to-date. The quarterly dividend is $0.69 a share ($2.76 a year) to yield 5.25%.
The company had a record second quarter. Quarterly earnings were $479 million ($0.75 per share), quarterly adjusted EBITDA was $1.1 billion, and quarterly adjusted cash flow from operating activities was $837 million ($1.44 per share). Revenue was $1.9 billion, up from $1.4 billion last year. First-half revenue was $3.4 billion, compared with just over $3 billion in 2023. Good numbers all around. Pembina raised its adjusted EBITDA guidance range to $4.20-$4.35 billion (previously $4.05-$4.30 billion).
On April 1, Pembina closed the $3.1 billion acquisition of additional interests in the Alliance pipeline and Aux Sable gas processing facility. Following the second quarter, Pembina acquired the remaining 14.6% interest in Aux Sable’s U.S. operations and now has fully consolidated ownership of all Aux Sable assets.
These Canadian pipeline giants are suitable for both growth and income portfolios. However, they are not without risk. Consult with your advisor before investing to ensure the stocks align with your risk tolerance and financial objectives.
Gordon Pape is one of Canada’s best-known personal finance commentators and investment experts. He is the publisher of The Internet Wealth Builder and The Income Investor newsletters, which are available through the Building Wealth website.
Follow Gordon Pape on X at X.com/GPUpdates and on Facebook at www.facebook.com/GordonPapeMoney.
Notes and Disclaimer
Content © 2024 by Gordon Pape Enterprises. All rights reserved. Reprinted with permission. The foregoing is for general information purposes only and is the opinion of the writer. Securities mentioned carry risk of loss, and no guarantee of performance is made or implied. This information is not intended to provide specific personalized advice including, without limitation, investment, financial, legal, accounting, or tax advice. Always seek advice from your own financial advisor before making investment decisions.
Image: iStock.com/Yakobchuk
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