Inter Pipeline Ltd.

IPL : TSX : C$25.57
Target: C$27.00

Inter Pipeline is a petroleum transportation, storage and natural gas liquids extraction business based in Calgary, Alberta. In western Canada, IPL owns and operates 6,200 km of pipeline, 19 mmbbls of storage capacity and three major natural gas and liquids extraction facilities with the capacity to process 6.2 bcf/d of natural gas in Canada. The company also holds the fourth largest independent bulk liquid storage business in Europe.
All amounts in C$ unless otherwise noted.

Infrastructure — Pipelines
Investment recommendation
Inter Pipeline announced a 13% increase to its annual dividend to $1.29 from $1.14 per share. The increased dividend will commence with its September 2013 dividend. The timing of the increase will likely come as a pleasant surprise to investors as it follows a smaller 3% increase announced earlier this year in conjunction with the corporate conversion announcement and is ahead of the company’s typical schedule for announcing dividend increases in November. The dividend increase reflects management’s confidence in the sustainability and growth of the company’s future cash flows. In the past few months, the
company has announced several highly accretive projects such as the Kirby South oil sands project tie-in to Cold Lake, the expansion of the Polaris Pipeline for additional volumes to the Kearl oil sands project, the Canexus lateral line connecting to the Cold Lake pipeline, and the renegotiation of its Cochrane facility sales agreement with NOVA Chemicals, all of which are expected to bolster cash flow over the next couple of years.

With continued robust activity in the region, we would not be surprised to see further initiatives similar to those listed above.
Longer term, growth will continue to center around the development of the company’s oil sands transportation infrastructure where it is currently working on a planned $2.6 billion expansion of its Cold Lake and Polaris pipelines. We expect Inter Pipeline to continue delivering strong annual dividend growth for the next several years.

We are maintaining our BUY rating and C$27.00 target price.

Our 12-month target price is based on a net asset value approach and assumes modest volume increases and continued toll increases at the Conventional Oil Pipelines business. NGL fractionation margins are volatile and difficult to predict; we have assumed longer-term fractionation margins closer to the long-term historical average. Our target also reflects the forecast value accretion represented by planned expansion projects and imputes partial value for the potential upside to
development advances and additional third party volumes on its Cold Lake and Polaris expansions.


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