TD Waterhouse comments this morning
Inter Pipeline Ltd.
(IPL-T) C$24.81
Exploring European Storage Sale; Unsolicited Offer Confirmed
Event
Inter Pipeline Ltd. (IPL) Q2/19 AFFO/share of $0.54 was above our forecast of $0.50
and consensus of $0.48, but below Q2/18 AFFO/share of $0.64.
Impact: MIXED
Q2/19 Results Above Forecasts: Q2/19 AFFO/share of $0.54 was above our
forecast, largely driven by a better-than-expected recovery in conventional FFO
and lower sustaining capex. The conventional business benefited from greater
midstream marketing due to increased blending activity, although the segment
continues to face some headwinds from competition on the Mid-Saskatchewan
system. Partially offsetting the conventional out-performance was lower NGL
Processing contribution due to narrower frac-spreads.
Purchase Offer Confirmed: IPL responded to an IIROC request to address
a media report, and confirmed that it "received an unsolicited, non-binding,
conditional and indicative proposal to purchase the company"; however, no
agreement, understanding, or negotiation is ongoing with any third-party. IPL did
not quote the price offered, which was speculated at $30.00/share in the media.
2021 Estimates Introduced: Concurrent with Q2/19 results, we have introduced
our 2021 estimates for IPL. We see y/y growth coming largely from full-year
contribution from the CAPL Phase 1 and 2 expansions, and conventional as L3R
relieves some apportionment issues, partially offset by an increase in financing
costs.
Target Price Unchanged: We have updated our model with the results of the
quarter, a lower NGL price outlook, our 2021 forecasts, and the CAPL Phase 2.
We have also rolled forward our valuation to be based 50/50 on our 2020/2021
forecasts, and the result is that our target price remains unchanged.
TD Investment Conclusion
We believe that the emergence of an unsolicited offer is a salient data point for
investors about how the recent IPL share price was undervaluing the company. Even
if an offer does not crystallize, we believe that the equity markets will reflect more
growth and less risk into IPL than it did before this offer surfaced. Our base-case
thesis values IPL as a continuing independent company, and any sale of the storage
business or sale of the company could potentially surface even more value. The
Heartland PDH/PP facility is IPL's largest growth driver, and we expect investors to
become increasingly comfortable with the risk/return profile of the project.
Outlook
Potential Sale of European Storage: IPL has announced that it is exploring potential
sales options for its European Bulk Storage business. The business comprises 23
terminals across the U.K., Denmark, Sweden, Germany, Ireland, and the Netherlands.
IPL acquired seven of the terminals in a US$270-million transaction that closed
November 30, 2018. IPL believes that a sale would not change its credit rating. The
proceeds from the potential sale would be used toward paying down debt and financing
the capital program, the bulk of which comes from HPC.
Based on management’s initial assessment, it believes that there will be strong buyer
interest in the assets. We note that the segment’s utilization has improved q/q, and we
believe that the transaction multiple will exceed the 9.5x that IPL paid for the NuStar
assets. We estimate that the assets will potentially sell in the 10x11x EBITDA range
for proceeds of ballpark $1.1 billion$1.2 billion based on our 2019 estimates.
Viking Connector: The Viking Connector will transport various grades of light crude
production from the Viking and Mannville formations to the Edmonton Market hub.
Pipeline capacity in the region is limited, and producers are currently trucking products
at premium costs, making the new Viking Connector a cost-efficient alternative for
producers to move products to Edmonton. The 75km, eight-inch diameter pipeline is
expected to have throughput volume of 10,000 bpd15,000 bpd. The addition of the
project brings IPL’s active capital program to ~$3.7 billion.
Key Risks to Target Price
Key risks to target price include: 1) Higher-than-expected bond yields; 2) acquisitions
that do not create shareholder value; 3) operational disruptions; 4) commodity prices; 5)
toll disputes; 6) changes in production volumes of natural gas and crude oil in Western
Canada; 7) political and regulatory risk; 8) access to capital and cost of capital; 9) large
project execution risk; and 10) foreign exchange movement.