Will this value play be an outperformer?

I’m always looking for the next value play in the current market environment. I believe that one of the attractive value plays lies within the pipeline sector. Today’s blog covers my reasoning behind this potential.

The fundamental picture

Given the “clean green” movement over the past few years, you’d think that you might want to avoid the energy industry. I have written about the fallacy of that thought in the past. In fact, if you follow this blog, you know that ValueTrend profitably bought oil back in the fall of 2020 when everyone else was bearish. True…In the long run, falling oil demand due to regulatory and climate-related pressures could hurt the pipeline industry. I won’t get too deep into the fundamental side of the trade, but its a good idea to understand the basics surrounding the industry.

Pipelines largely profit on volumes, not commodity prices, although prices affect profitability to some extent.  Volume-based pricing ensures steady, if not absolutely linear, cashflow. Having said that, when fossil fuel prices are low, profits for the producers are thin.  This influences how much a pipeline can charge the producers. Pipeline infrastructure (cost of building pipelines) is pricy, so they tend to be high debt operations.

However, it will take considerable time for the usage of fossil fuels to meaningfully decline to a level where pipeline profitability threatens service debt payments. It is expected that these debt obligations are sustainable for at least the next decade. Meanwhile, Russia and Australia are resisting the “green” movement. Fast growing nations with huge populations like India and China have outright stated they are not interested in participation in the agenda. Here is an article in Scientific American from just last week noting these facts. Conclusion: demand for fossil fuels is not going to disappear any time soon, and supply/demand may drive prices up in the coming year. Pipelines will have a product to ship for a while yet.

In the near-term, the pipelines look oversold and undervalued in Canada.    If my view on rising oil prices in the coming year turns out to be correct, pipelines will be in even better shape as volume prices increase. But, you know me. I am not banking on anything much past a year when it comes to any stock or sector trade. The charts will tell us all we need to know – when to buy, when to sell. So enough of this fundamental stuff. Lets see what the charts have to say about pipeline prospects. I’ll post the charts of the 4 big pipelines in Canada.

Enbridge (ENB)

Enbridge broke its $46 lid recently. The stock targets somewhere in the low-$50’s. While that might only suggest 10% upside, don’t forget that the stock pays a tidy 7% yield. We hold this stock in the ValueTrend Income Platform.

TC Energy (TRP)

 

TC Energy (TransCanada Pipeline of old) just broke its $59-ish resistance point, while simultaneously breaking a downtrend.. The stock targets about 10% upside, and pays about 5.8% dividend at current pricing. Price target is $65, which suggests about 10% upside.

Pembina (PPL)

Pembina is struggling to break $37 resistance. Should it manage to do so, the stock targets $47-$48 – which puts it well into a 20% return potential. The 6.8% dividend adds to that potential. Will it break $37? We hold the stock in both our Income and Equity Platforms. So, I hope so! Meanwhile, it is building a healthy uptrend that began last November.

Inter pipeline (IPL)

After breaking out of its $14 base, IPL hit its $18 target. It looks to be breaking that, although its struggling a bit. Next target is near $22, implying close to 20% upside assuming it can find new legs from here. A yield of only 2.6% makes this more of a capital gains play.

New Video – Hedging against a bear market

I’m trying to offer differing content for my video’s lately. The most recent video addresses the subject of hedging a portfolio in a bear market. Here is the clip.

 

11 Comments

  • Besides pipelines. Natural gas has some seasonal strength. If you look at eh chart for Antero Resources. I am a newbie to charts and technicals. Do you see a cup and handle formation taking place?

    Reply
    • Rajiv–while I won’t comment on an individual stock – the gas chart is officially still in a down trend. Having said that, it has the potential to reverse that trend if it can maintain its recent path of putting in a higher low (gas hit 8.22, then rallied and recent low was a bit over $9). Not until it passes above the 200 day SMA and takes out the last peak of around $11 do we have evidence of the downtrend potentially ending.

      Reply
  • Hi Keith,
    What’s your view on what will happen to the stock price of ENB if Michigan is successful in closing Line 5 on May 12th?

    Reply
    • I’m going to ask Craig, my co-manager of our platforms asd see what he says re the fundamentals on that event. I’ll post his response.

      Reply
    • OK–Wendy, here is Craig’s reply:

      “I have seen estimates that suggest Line 5 volumes contribute approximately 5% to ENB EBITDA. Assuming that these volumes are not shifted elsewhere on the Mainline System that is not an insignificant number. The threat to shut down Line 5 is a challenge that has continued to fester for a number of years. The issue appears to be coming to a head. Currently the two sides have been in mediation since April 16, ahead of Michigan order to shut the line by May13. On the political side negotiations also continue to play out between US and Canada. With Canada hopefully fighting a bit harder than for the Keystone XL project, that was cancelled on President Biden’s first day in office. While all negotiations and court rulings are unpredictable the market does seem set to look beyond, at least to the quarterly results set to be released May 7th.”

      Reply
  • Keith, I feel very lucky to be able to read and watch your professional opinions.

    The more I learn however, the more questions I have.

    I was thinking of locking in some gains in order to make a purchase elsewhere.

    The sell: IHI

    The buy: PPL.

    Then I thought about Lynch’s famous quote of pulling the flowers and watering the weeds.

    Where do you find balance in a scenario like this?

    Thank you!

    Reply
    • Thanks Lance
      Take a read of my response to Kyle’s question re the timing of pipelines. To me its a much a question of a setup as it is a question of lowering beta by selling overbought stocks in high beta industries and buying emerging charts in low beta industries.
      True, the market can keep pushing the high beta play. But my macro view is becoming more cautious–see last Bear-o-meter reading. While not bearish, we determined we would like to take some risk down. Its always up to the individual to determine where they stand on that outlook. Nobody actually “knows” what will happen, all you can do is follow your own strategy. Ours is low-risk above squeezing more out of an overbought market. But, we’ve been wrong before. We can live with that.

      Reply
  • Pipelines also caught my attention since reaching resistance level. It appears some of have shorter term moving averages starting to round down. What sign or indicator would you watch to help confirm a move upwards?

    What is your opinion on Canadian telecoms and electrical utilities? Is their likely more upside or is this the top in the near term (4 months)?

    Thank you for sharing some of your tips and insights.

    Reply
    • Personally, I love to see a basic chart breakout–ENB has had one (we own), PPL not yet (we own that too)- we figure the charts are neutral for now, but give the lower beta, the high dividend and the longer termed outlook for energy, we are ok to sit and earn the dividend while waiting.
      We very much like the utilities too. Again, low beta – likely an area we will see relative strength in if as when the market flops around from its overbought status over the summer.

      Reply
  • Hi Keith,
    On the topic of moving commodities around North America, I was wondering if you could give me your opinion on the railway stocks. I know that you don’t talk about specific stocks, but in general, are they apart of the opening up rotation? I was noticing the decline in CNR lately. It’s heading towards its approximately $130 resistance level, which I find confusing if they apart of the opening up rotation. Maybe it’s a buying opportunity?
    CNR has a more precipitous decline versus CP’s decline, and just wondered why the railways are declining. I also wondered if a decline in railways is a pre-indicator of a sell off of the broader market? Any insights on railways would be appreciated. Thanks

    Reply
    • Wendy–I wont comment on individual stocks outside of the blog I write as I cant become an online advisor to people–however, it is true that when transports perform worse than industrials, it is a sign of a weakening overall market. This is one of the tenants of Dow Theory–I use it in my Bear-o-meter as one of the indicators (divergence)

      Reply

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