IA Capital Markets.. G&M Upgrades
IA Capital Markets Elias Foscolos sees potential upside and limited downside in Inter Pipeline Ltd. (IPL-T) as the expiration of Brookfield Infrastructure Partners LPs (BIP-UN-T +0.76%increase ) approaches. With that view, the analyst upgraded his rating for its shares to speculative buy from hold on Wednesday ahead of the June 10 deadline. We believe potential outcomes fall under three broad scenarios: 1) BIP acquires IPL, 2) IPL surfaces an alternative option, and 3) IPLs shareholders just say no to BIP, said Mr. Foscolos. Under Scenario 1, we believe the probability that shareholders accept BIPs current $16.50/share offer is remote and that an increased offer in the $19.00-20.00 per share range is more likely. Under Scenario 2, potential alternatives could include an en bloc sale to a third party, which we believe is unlikely, as well as partial monetizations of certain assets to enhance shareholder value. We believe a partial sale of the Oil Sands Transportation (OST) business would move the needle the most on valuation. If Brookfields offer is increased, Mr. Foscolos said he sees modest upside, which he thinks is significant on an annualized basis. Conversely, if a alternative does not emerge, he expects short-term downward pressure on Inter shares, however he sees significant appreciation within a year when the HPC commences operation. Any other scenario such as a partial sale of the HPC, the OST business, or another asset would likely add modest upside, he added. Mr. Foscolos maintained a target of $19.50 for Inter shares. The average on the Street is $17.66, according to Refinitiv data. Since BIP announced the offer, IPL has (a) initiated a strategic review process, (b) delivered solid Q1/21 results underpinned by strong NGL frac spreads, which should continue into 2021, and (c) provided additional details regarding the HPC, including an updated capital cost estimate and EBITDA guidance. Finally, stock prices in the sector have sharply rebounded, with IPL underperforming peers, he said.