Potent Yields in the Pipeline

03/03/2010 12:01 am EST


Roger Conrad

Chief Analyst/Managing Partner, Capitalist Times

The best energy infrastructure trusts have nice growth prospects without much downside should energy prices head south, writes Roger Conrad in Canadian Edge.

When it comes to investing, even a money market fund or a certificate of deposit doesn’t offer perfect safety. But yields of 7% to 11% backed by healthy and growing companies come pretty close—especially when you add in the fact that the dividends are paid in the natural inflation hedge of Canadian dollars.

As the debacle of late 2008 proved, operating energy infrastructure is every bit as reliable of a business as generating power under long-term contracts to utilities. One reason is [that] the primary customers are large energy companies, some of which are among the most creditworthy in the world. Another is [that] profits from pipelines, energy storage facilities, and processing centers don’t depend on energy prices. In fact, revenue is frequently guaranteed by contracts that bill based on capacity, rather than throughput. As a result, the best of this sector are immune even from the ups and downs of energy production.

Keyera Facilities Income Fund (Toronto: KEY-U, OTC: KEYUF) and Pembina Pipeline Income Fund (Toronto: PIF-U, OTC: PMBIF) rate the best of this class. Both proved the reliability of their revenues by increasing distributions over the past couple years, as they brought profitable new assets and began earning cash from them even as the financial system and energy patch were floundering. And both have a rich pipeline of new projects to bring on line coming forward.

These are focused primarily on still-growing oil sands development and non-conventional natural gas drilling. Keyera, for example, has forged a venture with Imperial Oil (Toronto: IMO, NYSE: IMO)—ExxonMobil’s (NYSE: XOM) Canadian arm—to provide transportation, storage, and rail off-load services for diluent, a light hydrocarbon commonly mixed with bitumen produced from oil sands.

The deal will enable Imperial to produce more oil and will line Keyera’s pockets with its trademarked fee-based income. Pembina, meanwhile, continues to bring the Mitsue and Nipisi oil sands project closer to startup, which will further engorge its cash flows.

Neither Keyera nor Pembina have converted as yet to corporations. In fact, it’s likely both will wait at least until late 2010. Both, however, have declared they’ll be paying at least the same level of distributions when they convert as they do now.

Coupled with low payout ratios, low debt, recession-resistant cash flows, and lack of exposure to energy price swings, that earns both perfect 6s under [our proprietary safety rating system]. And that point is underscored by the fact that neither has ever cut dividends.

Pembina still yields close to 9%, while Keyera yields only a bit over 7%. Both, however, are in line for solid cash flow and distribution growth for years to come, and particularly as rising oil and gas prices stir more energy patch activity and open the door to new projects.

Despite recent gains, Keyera Facilities Income Fund and Pembina Pipeline Income Fund are cornerstone Buys up to US$24 and US$18, respectively, for even the most conservative investors.

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