The collapse of oil prices hit pipeline and midstream stocks hard. They offer strong recovery potential when prices start to normalize. Here are four pipeline stocks we like.
Among Canadian energy infrastructure stocks, pipeline and midstream stocks performed far worse in the recent market downturn than those in other infrastructure subsectors such as the regulated utilities.
That’s because the collapse in oil prices has increased the potential for bankruptcies among oil and gas stocks. This, in turn, could lead to reduced volumes for pipeline and midstream companies.
But we see significant long-term recovery potential for pipeline and midstream shares once oil prices rebound. That said, some pipeline stocks are riskier than others, just as the pipeline group in general tends to be riskier than regulated utility stocks. That’s something to keep in mind when you plan your exposure to the various economic sectors and their respective subsectors.
Enbridge and TC Energy are safest
Among pipeline stocks, we view Enbridge Inc. (TSX—ENB) and TC Energy Corporation (TSX—TRP) as your safest choices. Both are well diversified across North America and their oil and gas company customers are generally considered less at risk than those of Western Canadian focused pipeline companies.
TC Energy has acted the more defensively of the two, and we suspect it will continue to do so. Its shares are down 15.2 per cent from their February high. Enbridge is down 25.7 per cent from its high.
TC has highly contracted assets, a relatively strong customer base, the ability to fund capital expenditures from available liquidity and earnings that more than cover its dividend. The stock currently yields 5.0 per cent. Buy.
While TC looks like it’s better positioned to sustain its dividend than Enbridge, the latter also has highly contracted assets and a strong customer base. And though earnings are not projected to cover dividends this year, the company’s distributable cash flow is expected to do so. Enbridge yields 7.6 per cent. Buy.
Extra risk may mean extra reward
If you don’t mind taking on some risk, Pembina Pipeline Corp. (TSX—PPL) appears to offer superior upside potential after declining 43.7 per cent from its February high. The company’s Western Canadian focus has raised concerns about counter-party risk, or the financial health of the oil and gas companies it deals with. Still, about 80 per cent of its credit exposure is with investment grade and similar-rated counter-parties. It yields 8.3 per cent. Buy.
Finally, Keyera Corp. (TSX—KEY) appears to us to be the riskiest choice of the stocks reviewed here but offers the most upside potential. Its risks are similar to Pembina’s. It yields 9.8 per cent and the dividend seems sustainable. Buy.
This is an edited version of an article that was originally published for subscribers in the May 8, 2020, issue of The Investment Reporter. You can profit from the award-winning advice subscribers receive regularly in The Investment Reporter.
The Investment Reporter, MPL Communications Inc.
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