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 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 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.