# Pipeline Stocks (PPL, IPL, ENB, TRP, KEY, ALA)



## Killer Z (Oct 25, 2013)

*Pipeline Stocks (PPL, IPL, ENB, TRP, KEY)*

All of these stocks have had an incredible run these past two years, however they have taken a significant hit over the past couple days. I thought I would canvas the crowd as to what their thoughts are on their respective positions in the pipelines (i.e. Buy, Sell, Partial Sell, Hold, etc.).

IPL is one of my largest holdings, and thus far I have simply held my position. Look forward to hearing your comments.


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## AltaRed (Jun 8, 2009)

I believe all, or at least the majority, of them have financial metrics which remain in nosebleed territory. It is one thing to 'hold' existing positions for the long term as part of a 'buy and hold' strategy (as I do), but it would be nuts to be buying more at these levels. This problem should self-correct in the next 2 years as long term interest rates as measured by GoC bond yields move up 1-3 percentage points.

P.S. ALA is not a pipeline stock. It can best be described as a utility or midstream stock.


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## My Own Advisor (Sep 24, 2012)

I'm with AR on that analysis...re: buying lots more at these levels.

I tend to DRIP most of these stocks you mentioned and absolutely have no plans to sell; instead collect dividends, see them reinvested to buy more shares every month and quarter. Long-term holds.


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## Synergy (Mar 18, 2013)

My Own Advisor said:


> I'm with AR on that analysis...re: buying lots more at these levels.


I'm a bit confused, I thought AltaRed stated that the metrics are in "nosebleed territory" and that "it would be nuts to be buying more at these levels". If you agree with his post would not not turn off the DRIP's until the metrics start to make a little more sense?


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## avrex (Nov 14, 2010)

I agree. These stocks have lofty valuations.

I wouldn't specifically state Buy, Sell, etc. on these stocks
Instead, make sure you are *properly diversified.*

In my opinion, *pipeline stocks *should comprise no more than a *maximum of 15%* your entire *equity* portfolio.
If you have more than 15% (based on the last 2 year price run up), I would sell some.

However, if you have zero or very little pipelines in your portfolio, I would try to increase it to around 5-7% of your entire equity portfolio and collect some of the nice 3% dividends that these stocks provide.

Here is my current ranking:
1. TRP.TO - TransCanada
2. GEI.TO - Gibson Energy
3. PPL.TO - Pembina Pipeline
4. ENB.TO - Enbridge
5. KEY.TO - Keyera
6. VSN.TO - Veresen
7. IPL.TO - Inter Pipeline


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## AltaRed (Jun 8, 2009)

Synergy said:


> I'm a bit confused, I thought AltaRed stated that the metrics are in "nosebleed territory" and that "it would be nuts to be buying more at these levels". If you agree with his post would not not turn off the DRIP's until the metrics start to make a little more sense?


I wouldn't have DRIPs going for that reason, i.e. put the divys elsewhere, but some folk live and die by DRIPs. To each his/her own.


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## Underworld (Aug 26, 2009)

Thanks guys, I just started researching what options I had for pipelines in Canada yesterday


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## My Own Advisor (Sep 24, 2012)

Synergy said:


> I'm a bit confused, I thought AltaRed stated that the metrics are in "nosebleed territory" and that "it would be nuts to be buying more at these levels". If you agree with his post would not not turn off the DRIP's until the metrics start to make a little more sense?


I tend to DRIP most of these stocks....not all of them. 

I have considered turning off the DRIPs but I don't see many deals that can be had elsewhere.


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## Pluto (Sep 12, 2013)

My Own Advisor said:


> I tend to DRIP most of these stocks....not all of them.
> 
> I have considered turning off the DRIPs but I don't see many deals that can be had elsewhere.


Here is a possible deal for you based on the idea that this can't go on for ever. Take ENB for example: EPS next year expected to be 7.3% higher than this year and a trailing p/e of 36 and a forward p/e of about 29. Doesn't make sense. But then for buy and holders, which isn't a bad strategy, selling is out of the question even though conceivably ENB will be cut in half at some point. 
so how about ceasing the drip and using dividends to buy something like Enbridge Inc - CA; PUT ENB 48 JAN-20-2017 when the stock appears to be breaking down - so far it hasn't broken its upward trend so right now it seems too early. Unless I am missing something I can't imagine enb being worth more than 25. So with that put expiring more than 2 years out there would be plenty of time for it to break down. What could foil this plan is ENB could go sideways for 2 or 3 years, but how likely is that? 

Anyway, since you were thinking of suspending the drips, focusing on what made you think those thoughts is your best clue to the future of ENB stock.


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## My Own Advisor (Sep 24, 2012)

Hey Pluto,

For me, as a buy and holder of these and 20+ other stocks, I won't sell. 

I could see another stock split for ENB when it gets closer to $70, it happened a few years ago and I could see it happening again.


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## humble_pie (Jun 7, 2009)

Pluto said:


> Here is a possible deal for you based on the idea that this can't go on for ever ... buy something like Enbridge Inc - CA; PUT ENB 48 JAN-20-2017 when the stock appears to be breaking down




use of puts to hedge against falling stock prices has frequently been discussed in cmf forum.

the conclusion is always that index puts to hedge all or most of a portfolio are far more reasonably priced. Individual stock puts are too expensive.

in particular, don't do this ENB strategy. There are many reasons why it's a guaranteed loser. I might post why - with graphics - if anyone is interested.

the proper strategy for protecting both a lucrative dividend plus a high stock price is a paired option strategy called a collar, not a one-sided put purchase.

collars have also been frequently discussed in the forum.


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## Pluto (Sep 12, 2013)

humble_pie said:


> use of puts to hedge against falling stock prices has frequently been discussed in cmf forum.
> 
> the conclusion is always that index puts to hedge all or most of a portfolio are far more reasonably priced. Individual stock puts are too expensive.
> 
> ...


Yes, please post with graphs. (BTW, the tesla puts have done well last couple of weeks. )


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## humble_pie (Jun 7, 2009)

many puts have "done well last couple of weeks."

this does not mean that, when used strictly for hedging purposes in down markets as you have explicitly set forth above, they are a good strategy.

the ENB jan 2017 48 put is costing roughly 3% annualized to put on. Meanwhile the annual dividend yield is something like 2.52%, so this monoput strategy is a net loser.

to make things worse, there's a potential capital loss of roughly 12% built into the 48 strike. 

the proper strategy for investors who a) are fearful, b) want to protect dividends, & c) don't want to take an immediate capital gain by selling stock is a collar. A collar is a pair of options.

options generally work best in paired, tripled or quadrupled formations, not as monopositions.


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## My Own Advisor (Sep 24, 2012)

What are your thoughts on an ENB stock-split Humble? Around $70? Happened last time, not that long ago..


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## doctrine (Sep 30, 2011)

For the record, I have thought pipeline stocks have been overpriced for more than a year, but they've kept going up. 3.5% dividend at 100% payout? No thanks. Too small a dividend yield for too high a payout. Some of them have zero growth in book value per share. Some P/Bs are in excess of 5....Graham is rolling in his grave.


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## Pluto (Sep 12, 2013)

My Own Advisor said:


> Hey Pluto,
> 
> For me, as a buy and holder of these and 20+ other stocks, I won't sell.
> 
> I could see another stock split for ENB when it gets closer to $70, it happened a few years ago and I could see it happening again.


I believe you wouldn't sell enb, and so I wouldn't try to talk you out if it. Just seems to me it will fall about 50% sometime in the next 1 to 2 years. so I figured buying a put option might be worthwhile. But it seems humble pie objects, and she could be right. Even so, ENB is on my list to consider buying puts when the time looks right. (Typically stocks go down faster than they go up, so as far as options go, I prefer puts.)


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## Pluto (Sep 12, 2013)

humble_pie said:


> many puts have "done well last couple of weeks."
> 
> this does not mean that, when used strictly for hedging purposes in down markets as you have explicitly set forth above, they are a good strategy.
> 
> ...


I think I see your point. I think your analysis answers the question - what happens if ENB doesn't drop? Answer: Capital loss on the put, and continued capital gains on the stock. 

If ENB does roll over and come back to reality, the option should rapidly go up in value. Any way ENB is on my list of potential put buys. I think the idea it can drop 50% is realistic, (but I'm not claiming that will commence immediately). I'm just shocked people would pay $55 for 2.54 yield, less than $2 in earnings, and less than 8% growth. to me, it's been going up on psychology, not basic business. Apparently, institutions own about 75% of stock, and I think they are going to, at some point, start lightening up. When that starts in earnest, look out below.


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## humble_pie (Jun 7, 2009)

it's not that i object to use of a put, it's that a simple one-sided purchase of a put is not nearly good enough.

it will, in this case as in many cases, be a net losing operation because the cost of maintaining the put position is greater than the dividend yield. There's also too much downside loss risk.

the classic solution is to pair the put in a collar strategy ... didn't i say something about collars already? & i wasn't talking about laundry


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## humble_pie (Jun 7, 2009)

Pluto said:


> If ENB does roll over and come back to reality, the option should rapidly go up in value. Any way ENB is on my list of potential put buys. I think the idea it can drop 50% is realistic, (but I'm not claiming that will commence immediately). I'm just shocked people would pay $55 for 2.54 yield, less than $2 in earnings, and less than 8% growth. to me, it's been going up on psychology, not basic business. Apparently, institutions own about 75% of stock, and I think they are going to, at some point, start lightening up. When that starts in earnest, look out below.



buying a plain put is fine for somebody who doesn't hold the stock imho.

but if so many misgiving about the stock, why would anyone continue to hold it while trying to salvage something via puts?

a classic collar is only used when the dividend yield is high enough that the collar wearer wants to preserve it, meanwhile locking in downside protection.

a collar is selling a call & simultaneously buying a put. Traditionally the strike prices were identical & traditionally the premium received from the call sell was slightly higher than the premium paid for the put buy.

but that's been history for some time now (non-existent near-zero interest rates) so today puts of the same strike cost significantly more than calls.

cmf member lephturn was an expert collar mender in RRSP. He'd sell ATM calls while seeking - sometimes not on the exact same date - to buy OTM puts. In BCE he'd go an increment or 2 lower in puts than the ATM strike price, thus he'd be locking in a capital loss if forced to exercise but at least he would have received some $$ from the call sell.

this strategy of risk-free protected dividend via collaring is practiced by institutional funds on a massive scale. It replaces government bonds with a somewhat higher guaranteed dividend yield. 

institutional collaring, unlike lephturn's, would tend to use pairs with the same strike, thus the collar would be a debit strategy that would have to be netted against the dividend. Even so, the net return would turn out to be better than federal T-bills. 

at all times, a collar strategy requires that its net cost be less than the dividend yield on the stock. This is why an enbridge collar does not make sense, the dividend yield is already too low.


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## Pluto (Sep 12, 2013)

humble_pie said:


> buying a plain put is fine for somebody who doesn't hold the stock imho.
> 
> but if so many misgiving about the stock, why would anyone continue to hold it while trying to salvage something via puts?
> 
> ...


Thanks for the informative feedback. No I don't own the stock, just preparing a plan to make some money when things turn negative.


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## dime (Jun 20, 2013)

What's been steadily driving PPL up continuously? The PE seems high, but something keeps investors piling in. Is it the increasing yield? EPS growth estimates? It's been hard to know when to sell and how much longer to keep holding. With the market getting smoked today I'm hoping I've not missed the ideal selling point.


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## Pluto (Sep 12, 2013)

dime said:


> What's been steadily driving PPL up continuously? The PE seems high, but something keeps investors piling in. Is it the increasing yield? EPS growth estimates? It's been hard to know when to sell and how much longer to keep holding. With the market getting smoked today I'm hoping I've not missed the ideal selling point.


I think people buy these for yield, and a little growth. The alternatives to dividends are pitiful - some measly interest rate, so the stock goes up beyond what its growth rate would justify. When the stock price increases far exceeds the growth prospects its a good idea to sell. Objections to that are, but I lose the income. My reply to that is: No you don't: you get years of future income now in the form of capital gains, and you let the buyer of your stock take the risk. It is not really possible to know the ideal time to sell, but buying right now seems unrealistic, so selling may not be a bad idea. P/e of 40, and earnings growth no where near 40, 5 year average p/e around 26. This is another example of a touch of insanity in the market. Add it up. It can't sustain these price levels indefinitely. When people are greedy, complacent, and a bit insane, be generous, and give them what they want.


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## My Own Advisor (Sep 24, 2012)

Pluto said:


> I think people buy these for yield, and a little growth.


Have you seen the 5-year chart? Rather impressive. You get both with pipeline stocks, yield and growth.


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## jcgd (Oct 30, 2011)

My Own Advisor said:


> Have you seen the 5-year chart? Rather impressive. You GOT both with pipeline stocks, yield and growth.


Fixed it for you.


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## doctrine (Sep 30, 2011)

The 5 year charts on some of these names have impressive capital gains, but far less impressive dividend growth. PPL has 5 year dividend growth of 11%, barely 2% per year. But capital gains of 135%. Should you really pay 40+(!!) times earnings for a 3.5% yield, 100% payout and 2%/year dividend growth?


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## My Own Advisor (Sep 24, 2012)

Well, I meant in present tense as well jcgd, but thanks! 

Well, in the green today with the markets, nothing correcting or crashing or anything. False buying alarm.


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## Pluto (Sep 12, 2013)

My Own Advisor said:


> Have you seen the 5-year chart? Rather impressive. You get both with pipeline stocks, yield and growth.


I meant earnings growth. by the 5 year chart I suspect you are talking about the stock price, not the earnings growth. 

The stock prices have gone up mostly due to p/e expansion that is not sustainable. The earnings are not keeping up with stock price growth. This is similar to POT back in 2008 when one would look at its 5 year chart. Ultimately reality set in. 

Think about it: PPL 5 year average p/e around 25. Current p/e 40. I don't see earnings growth to support a p/e of 40. What was it's p/e in 2009? And what price would it need to be today to have its 2009 p/e? Probably a lot lower.


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## Eder (Feb 16, 2011)

I dont follow PPL but IPL has a lot on its plate the next 8 years so is trading more on forward earnings...I cant get my head around the current pe either but I wont sell this stock till management starts talking about buying hotels or something.


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## warp (Sep 4, 2010)

As we have extensive holdings in most of these stocks, the last few days, ( like everyone else), have been brutal.
It's been a rough ride, but part of the process if you want to hold stocks instead of GIC's.

I have never bought ENB , as it always seemed too expensive, and the yield always seemed too low for me. However it has done very well for its owners over the last 5 years.

I do sometimes get the feeling that the others...IPL and PPL etc...are also a bit more expensive these days...but like others here, I am holding onto them, and not selling.

Nice to see them move back up some today.


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## My Own Advisor (Sep 24, 2012)

Gotcha Pluto...by growth I was immediately jumping to price appreciation, not necessarily earnings growth.

I'm with you now!


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## dime (Jun 20, 2013)

Anyone understand the standard valuation methods used for pipelines by the market? Can any experts clear up my confusion with cash flow as a valuation method for pipelines?

The forward PE for PPL is 28, which would make sense if the earnings were growing near 28% next year, but the earnings per share is growing more around 17% for the next couple years.

The reports from the banks on pipelines use other valuation methods for the pipelines instead of PE and EPS. They rate pipelines using cash flow instead of earnings. Why? What is it about pipelines that special valuation methods are used, instead of just PE and EPS? 

Morningstar reports an Operating cash flow of 684 m for the past trailing 12 months. At $45 a share this should be a P/CF ratio of 15.2 but I see a price to Cash Flow ratio of 20.9 shown on Morningstar.com 

Then I notice that the comparison table in Royal Bank's Energy Infrastructure report uses adjusted cash flow from operations (ACFFO) to compare the different pipeline stocks. Confusion again.

But this report on Pembina from Scotiabank on pg 92  rates PPL 'outperform' and uses Free Cash Yield as a valuation method. It estimates $2.71 free cash flow per share at 4.9% gives a target of $55. 

Then I notice Morningstar  shows negative free cash flow going back years which doesn't make much sense when Scotiabank is reporting positive growing free cash flow for PPL. 


At least a stocks PE and EPS are common valuation ratio and the information is the same on all reports. 
Where it seems like using free cash flow as valuation ratio varies. Confusing!


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## leslie (May 25, 2009)

In my jaded opinion, the decision to switch from earnings valuations to cash valutions happens when valuations become stretched and the market needs an excuse to justify going higher.
Pretending that cash is all important is also a great excuse to justify all the time and money spent by the Analysis industry (and charged to you).
The 'cash' being measured and used for valuations is a purely subjective invention of each person using it. 
Give me good old financial accruals any day. 
Look at the three web pages starting at http://www.retailinvestor.org/cashtruths.html


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## Pluto (Sep 12, 2013)

I don't think you are jaded, I think you are correct. Its just rationalization, a way of denying reality. And possibly a sales pitch by "financial advisors".


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## godblsmnymkr (Jul 15, 2015)

IF there is a recovery in oil here, which pipeline are you looking at buying? I currently have 0 exposure to energy. from the reading I've done I like TRP the best of the bunch.


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## fatcat (Nov 11, 2009)

i have enb and just inherited some trp
frankly i would like to dump them both
the oil situation combined with the political situation makes me want to look for solid dividends elsewhere
i do like ZEO a lot though
you get a one stop shop for oil and pipelines
owning it for me is a hassle because of the tax compliance burden


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## daddybigbucks (Jan 30, 2011)

good day for pipeline stocks. 
All are up 3-6%.


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## agent99 (Sep 11, 2013)

daddybigbucks said:


> good day for pipeline stocks.
> All are up 3-6%.


Any idea why? Only news was from Hillary C., but that would only affect TRP (assuming she would support Keystone)


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## avrex (Nov 14, 2010)

avrex said:


> I agree. These stocks have lofty valuations.
> 
> I wouldn't specifically state Buy, Sell, etc. on these stocks
> Instead, make sure you are *properly diversified.*
> ...


This thread is now one year old. Let's see how the pipeline stocks have done in the last year.

ENB.TO - Enbridge *-2%*
KEY.TO - Keyera *-17%*
TRP.TO - TransCanada *-23%*
IPL.TO - Inter Pipeline *-27%*
VSN.TO - Veresen *-30%*
PPL.TO - Pembina Pipeline *-31%*
GEI.TO - Gibson Energy *-45%*


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## doctrine (Sep 30, 2011)

I think pipelines are coming down to a reasonable valuation. I saw TRP moving towards $40 and was looking good. KEY and ALA also looking good; IPL maybe if it drops a little more towards $20. ENB though still very expensive, would have to come down 10-20% more for me to consider it. Basically, most of these companies are at least on my radar now.


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## Killer Z (Oct 25, 2013)

avrex said:


> This thread is now one year old. Let's see how the pipeline stocks have done in the last year.
> 
> ENB.TO - Enbridge *-2%*
> KEY.TO - Keyera *-17%*
> ...


Interesting to see Enbridge almost unphased ........I never did purchase any of these positions (or add to my IPL) since starting this thread, however I am beginning to consider doing so.


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## godblsmnymkr (Jul 15, 2015)

with the recent break out in oil prices, which pipelines do you like the best? I'm a little behind on my research on the sector and would hate to get caught flat footed here.
thanks


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## zylon (Oct 27, 2010)

*Couple interesting pipeline maps*

*Source of these maps:*
http://www.capp.ca/canadian-oil-and-natural-gas/infrastructure-and-transportation/pipelines


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