Screen of the Week – Infrastructure
With oil prices continuing to fall driven by coronavirus fears, muted economic growth, and excess supply, many infrastructure names have sold off considerably. In this week’s screen, each company offers stable cash flow with a large portion of fixed contracts, in addition to large and growing dividends, meaning this sell-off could be a time to initiate a position.
Tidewater Midstream (TWM.TO)
Although the company isn’t very well known given its quite small, $324M, market cap it checks all the right boxes. Tidewater has a large portion of fixed contracts and strong assets currently trading at an attractive valuation. TWM has a multitude of business lines, with a BC refinery, Alberta gas processing, and LNG plants, natural gas storage facilities and pipelines. The company is just concluding a large capital program and now is focusing on reducing leverage from 3.5x to 2.5x with its enhanced cash flow. Currently, with ~800M net debt, this should be a 1-2 year deleveraging program considering the company is producing ~110M in Free cash flow, and 95M after paying the 4%+ dividend. As they reduce leverage, it will offer options to continue to grow its gas processing operation and grow the dividend considerably, considering the payout ratio only stands at less than 20% 2020 estimates. The company currently trades at a low multiple with a 30%+ Distributable CF yield, all while trading at below 6x EV/Ebitda.
Inter Pipeline (IPL.TO)
The story for IPL is all about the heartland polypropylene complex, which is in the midst of construction, and once completed, the company believes it will add ~50% to EBITDA. However, issues remain for the funding of the project, the potential issues in the buildout, and their ability to sign these long term contracts, which have all been reflected in the performance of the stock. However, this project has the potential to be a game-changer and over time, we believe these risks will be sorted out. Along with this massive project, IPL holds a collection of great assets with the majority taking or pay in nature, with assets in bulk storage in Europe, NGL processing, and transport pipelines. The company pays 8%+ in the form of a monthly dividend, all while being covered by stable, long term cost of service and fee-based contracts, meaning even with weak pricing, the dividend looks safe. Once the heartland complex is complete, we think they’ll be able to pay off some debt, with a path to grow the dividend and continue to grow their oil sands infrastructure.
Although the company faced issues with regulatory approval and debt covenants as they waited to complete the WGL acquisition, these issues are now behind them and the asset mix and valuation look promising. The company now acts as a regulated utility, generating 55% of EBITDA from this business line. This is expected to continue to grow at high single-digit levels, through customer growth and regulated rate increases. The company continues to invest in this utilities’ growth along with its midstream operations while using funds from non-core power assets to help fund along with FCF. With the combination of high growth and strong return projects, we think the company should be trading at a closer valuation to similar regulated utility/infrastructure peers (Enbridge EV/EBITDA ~12X 2020 VS ALA ~9x).