Looking for stability

Bid for Inter Pipeline highlights Canada’s oil sector bright spot

WINNIPEG, Manitoba/CALGARY, Alberta – A recent unsolicited bid for Inter Pipeline Ltd has highlighted the potential of Canada’s midstream companies to offer insulation from volatile oil prices.

Inter Pipeline, Pembina Pipeline Corp and Keyera Corp own key infrastructure such as gathering pipelines, gas-processing plants and storage tanks that are in high demand, and reported record second quarter profits.

They are sometimes overlooked, however, because of the wider energy sector’s problems of congested export channels and low prices. Inter Pipeline shares jumped 14% in two days last week after a newspaper reported the bid, leading some investors to say that their full value has gone unrecognized.

“The entire energy infrastructure space is significantly undervalued and under-appreciated,” said Rob Thummel, senior portfolio manager at Tortoise Capital, one of Inter Pipeline’s biggest shareholders. “They own and operate critical assets and generate fee-based cash flows that are essential.”

Inter Pipeline, with a C$10 billion ($7.5 billion) market value, confirmed on Aug. 9 that it received an unsolicited takeover bid, but said it was not in talks to sell.

Interest in buying midstream assets has been “very active” in an otherwise slow energy M&A climate, said Stephanie Stimpson, a partner at Torys law firm, whose practice advises energy companies on mergers and acquisitions. Private equity investors and pension funds have been drawn to past deals by reliable returns.

“It’s a successful and profitable sector right now,” she said.

Companies like Inter Pipeline and Pembina ensure steady cash flow through long-term contracts, helping limit risk when crude prices tumble, said Nate Heywood, an AltaCorp Capital analyst.

Shares of Inter Pipeline, Keyera, Pembina and Gibson Energy Inc have all gained 20% or more this year. By contrast, the Toronto Stock Exchange energy index <.SPTTEN> is down about 12% this year as investors fret about obstacles to expanding oil export pipelines and the Alberta government’s mandatory curtailment orders to prop up prices.

CHRIS HELGREN/REUTERS Replacement pipe is stored near crude oil storage tanks in Kamloops, B.C., in 2016.