Inter Pipeline Ltd

Inter Pipeline Ltd (TSX: IPL) is a Canada-based energy infrastructure Company which is engaged in the transportation, processing, and storage of energy products in Canada. Its segments include Oil Sands Transportation, NGL Processing, Conventional Oil Pipelines and Bulk Liquid Storage. 

Key highlights

• Capital expenditure program for FY 2021:Recently, the management announced CAD 1 billion capital expenditure program for FY 2021. Approximately CAD 930 million from this total capital expenditures will be for organic growth initiatives, with the remainder invested in sustaining capital projects. The funding of this capital program is expected to be provided through a combination of undistributed cash flow from operations and available credit capacity.

Source: Company 

• Healthy Funds from operations: On the back of beneficial functions, the company managed to clock healthy FFO of CAD 196.0 million in the current quarter. The oil sands business, NGL processing business and Bulk liquid storage segment helped the company to grow its FFO, which was partially offset by the corporate costs. 

• Steady dividend distribution: The group continues with the track record of dividend distribution. The company announced a monthly dividend of CAD 0.04 per unit payable on 16th February 2021, with a record date of 22nd January 2021. Since its inception, the group has distributed approximately CAD 6.2 billion in cash payments to investors. Moreover, at the last closing price, the stock was offering a dividend yield of 3.69%, which is decent amid a low interest rate environment.

• Ample liquidity:At September 30, 2020, the group had cash and cash equivalents of CAD 33.8 million, along with this the group also had access to total committed credit facilities of CAD 4.6 billion, of which CAD 2.3 billion remained unutilized. On top of this, an additional unutilized demand facility of CAD 142.7 million provides ample liquidity to carry the operations smoothly.

Financial overview of Q3 2020

Source: Company 

• The company posted growth in operating revenue to CAD 632.9 million in Q3 2020, compared to CAD 590.8 in the previous corresponding period. The revenue increased due to healthy performance from NGL processing business and oil sands transportation business.
• EBIT in the reported quarter stood at CAD 60.4 million, against CAD 95.7 million in Q3 2019. The rise in the cost of sales and higher other operating expenses dragged the EBIT down.
• The company posted a net income of CAD 38.7 million in Q3 2020, against 79.9 million in Q3 2019. The drop in net income was primarily due to higher operating expenses along with higher income tax. 

Risks associated with investment 

The company’s business is exposed to the slowdown in energy demand. Also, the next wave of pandemic outbreak could weigh on the group’s performance as it could further reduce energy demand. 

Valuation Methodology (Illustrative): Price to Cash Flow 

Note: All forecasted figures and peers have been taken from Thomson Reuters 

Stock recommendation 

Given the uncertainties hovering over the global energy demand, the group performance was decent in the reported quarter, where its NGL processing and oil sands transportation segment registered a growth. High-quality counterparties largely supported the performance, with the group’s 75% of Canadian revenue secured from investment grade entities. The group also agreed to divest most of the European storage business for approximately CAD 715 million. Therefore, based on the above rationale and valuation, we have given a “Buy” rating at the closing price of CAD 12.99 on January 27, 2021. We have considered Enbridge Inc, Hydro One Ltd etc. as the peer group for the comparison.

Source: Refinitiv (Thomson Reuters)

Osisko Gold Royalties Ltd

Osisko Gold Royalties Ltd (TSX: OR) is engaged in acquiring and managing precious metal and other royalties and similar interests in Canada and other parts of the world.

Key Highlights:

• Management Update: Recently, the group announced the appointment of Ms. Candace MacGibbon to its Board of Directors. Again, the group reported the appointment of Heather Taylor as Vice President, Investor Relations.
• Better than industry margin profile: The group reported strong operational efficiency during Q3FY20, which stood higher than the industry median, which is a key positive. During the quarter, the group reported EBITDA margin, operating margin and a net margin of 59%, 38.8% and 22.5% respectively, higher than the industry median of 43.4%, 25.1% and 11.7%, respectively.
• Ample Liquidity: The corporation reported an impressive liquidity level, which include ~CAD 413.3 million of available credit-facility, which seems to be sufficient to surpass the current pandemic. Furthermore, the company has a cash balance of CAD 160.7 million along with the investment of CAD 317.7 million as on September 30, 2020.
• Improved Q4FY20 Sales: The group reported sales of 18,800 gold equivalent ounces (GEOs) during the fourth quarter of FY20, which led to a total of 66,100 GEOs, higher than the earlier guidance of 63,500 GEOs to 65,500 GEOs. Further, the group has strengthened its business in the fourth quarter and on having exceeded their revised guidance for the year.

Q3FY20 Financial Highlights:

• OR declared its quarterly results, wherein the company posted revenues of CAD 55.707 million, as compared to CAD 109.235 million in the previous corresponding period (pcp).
• Gross profit stood at CAD 30.806 million, as compared to CAD 20.851 million in pcp. The decline was due to a significantly higher cost of sales (CAD 15.236 million versus CAD 77.419 million in pcp).
• Operating income was reported at CAD 22.907 million, as compared to a loss of CAD 38.295 million in pcp. The improvement was primarily due to inclusion of impairment of assets amounting CAD 60.800 million in Q3FY19.
• Net earnings were reported at CAD 12.514 million, as compared to a loss of CAD 45.924 million in Q3FY19.
• The group reported cash and cash equivalent of CAD 160.705 million, while total assets were recorded at CAD 2,200.070 million.

Q3FY20 Income Statement Highlights (Source: Company Reports)

Risk: Volatility in gold prices might affect the group’s performance.

Valuation Methodology (Illustrative): Price to CF

(Note: All forecasted figures and peers have been taken from Thomson Reuters).

Stock Recommendations: The upward trend in GEOs continued during the fourth quarter and the company look forward for further growth catalysts in 2021 and beyond. The stock of OR has generated decent returns of ~15% and ~18% in the last nine months and one year, respectively. The group reported improved EBITDA margin and operating margin of 59% and 38.8%, respectively in Q3FY20, higher than 50.6% and 20.9%, respectively in Q2FY20, which indicates operational efficiency. Moreover, the group reported improved cash flows of CAD 75.345 million for 9MFY20, as compared to CAD 74.394 million, a year ago. The company has a diversified portfolio of 17 producing assets (majorly Gold) and is partnered with high quality operators like Agnico, Yamana, Newmont, Victoria Gold, Alamos, SSR, Eldorado, etc. with the lowest geopolitical risk profile, which augurs for stable business performance. Moreover, most of the partnered groups has reported the restart of their operations coupled with additions of new mines under their portfolio, which indicates improved royalties in the coming quarter. We have valued the stock using Price/Cash Flow based relative valuation method and have arrived at a lower-double-digit upside (in percentage terms). For the said purposes, we have considered peers like Agnico Eagle Mines Ltd, Royal Gold Inc etc. Hence, we recommend a ‘Buy’ rating on the stock at the closing market price of CAD 14.28 on January 27, 2021.

Source: Refinitiv (Thomson Reuters)

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