Canada has a long and proud history when it comes to energy pipelines. In 1853, the world’s largest natural gas pipeline was built in Quebec – a 25-kilometre cast iron marvel (At the time).
One of the world’s first oil pipelines was also built in Canada in 1862. Canada relies heavily on pipelines to meet the needs of its largest trading partner – The US.
More than half of the US’s oil imports and almost all of its natural gas imports are from Canada. This strong energy trade relationship makes the best pipeline stocks in Canada safe and reliable investments.
- Generous dividend yields.
- Several dividend aristocrats.
- More financial stability compared to other energy stocks.
- Resilience against weak markets.
- Slow growth.
- Vulnerable to environmental claims.
Pipeline companies are part of the midstream segment of the energy market with infrastructure that focuses on the transportation of oil, petroleum liquids, and natural gas from production areas to refineries (or shipment points).
- Ticker: ENB.TO
- Forward Dividend Yield: 6.75%
- Dividend Payout Ratio: 268.75%
- Dividend Yield (12-Month Trailing): 7.58%
- Upcoming Dividend Date: Dec 01, 2023
- Market Cap: $98.99 Billion
- Forward P/E Ratio: 16.93
Enbridge is the largest energy company in Canada (by market cap) and one of the largest companies currently trading on the TSX. It’s also the largest pipeline company in North America, controlling a massive network of oil/liquids and natural gas pipelines.
Its liquids pipeline network is roughly 28,600 kilometres, divided half and half in the US and Canada.
The 3 million barrels of crude and other liquids it produces account for roughly 65% of all Canadian crude/liquid petroleum exports and 40% of the US’s imports, making it the largest energy “artery” in North America’s energy lifeblood network.
The natural gas pipeline network is just as impressive. The 118,763 kilometres network connects five Canadian provinces and 30 US states and is responsible for 20% of the natural gas consumed in the US.
Enbridge is easily one of the best pipeline stocks in Canada, and the massive scale of its operations is just one element of it.
The company has already ascended to the title of an aristocrat in both Canada and the US, the latter of which requires at least 25 years of consecutive dividend increases. It has grown its payouts through one great recession and multiple phases of sector-wide turmoil.
It was a decent growth stock up until 2015 but fluctuated between 2015 and 2023. Still, the stock is quite resilient against factors like oil prices going up and down and has demonstrated the ability to retain most of its value even when the sector slumps hard on multiple occasions.
From a yield perspective, it’s usually one of the most generous stocks in the energy sector and one of the best large-cap dividend stocks trading on the TSX.
Apart from its pipeline business, it’s also a natural gas utility provider (largest in North America by volume) and renewable energy producer with a total production capacity of about 2.1 GW, enough to power about 966,000 homes.
- Ticker: TRP.TO
- Forward Dividend Yield: 6.77%
- Dividend Payout Ratio: 562.50%
- Dividend Yield (12-Month Trailing): 7.64%
- Upcoming Dividend Date: Oct 31, 2023
- Market Cap: $52.47 Billion
- Forward P/E Ratio: 12.49
TC Energy is an energy infrastructure and midstream company whose core business is pipelines.
It has a massive natural gas pipeline network of around 93,300 km, responsible for transporting a quarter of the natural gas consumed in North America.
The company has natural gas assets, not just in the US and Canada but in Mexico as well. It also owns one of the largest pipelines in Canada (Keystone).
The company also has an oil and liquids pipeline infrastructure spanning 4,900 km. This pipeline takes crude and petroleum liquids produced in Alberta to multiple US states.
TC Energy’s heavy lean on natural gas makes it a more compelling choice (compared to other energy stocks) for ESG/environmentally-conscious investors.
Natural gas is far cleaner than oil and may survive the fossil-to-renewable transition far longer, though both of them are decades away for now.
TC Energy also has two other business segments under its banner, making its operational portfolio more diverse. These are energy solutions and power generation (plus storage).
The latter is more conventional, with about 4.2 GW production capacity through seven power generation facilities.
That’s enough to power about four million homes. About three-fourths of this power generation is virtually emission-less, earning the company more ESG points.
The energy solutions business is more futuristic and combines capabilities like carbon sequestering, renewable energy, and energy efficiency.
The stock has risen 150% in two decades, between April 2003 and April 2023, making it a very modest grower. The dividends are a far more compelling reason to consider this stock, as it usually offers a very generous yield and is a well-established dividend aristocrat.
Pembina owns a collective 18,000 km of three different pipelines – Conventional, oil sands, and transmission. The conventional pipeline is mostly in Alberta though it connects to BC as well.
Oil sand pipelines are exclusively in Alberta, and the transmission pipelines cut through Saskatchewan to reach the US.
These pipelines, in addition to providing transportation services to Pembina’s clients, also augment the company’s own upstream and downstream facilities.
Even though the company has multiple divisions, the bulk of its business is pipelines.
The other major business segment is natural gas facilities. This includes fractionation and processing facilities, along with accompanying infrastructure for transportation and storage.
The company is also expanding its reach into operations like wind power and cogeneration facilities, mainly to raise its ESG profile.
The diversified business operations of Pembina set it apart even from other pipeline stocks that are, in turn, safer compared to energy stocks in general.
Pembina is perhaps one of the best pipeline stocks in Canada for capital appreciation.
It rose by about 300% in the two decades between April 2003 and April 2023. It’s also a compelling investment from a dividend perspective, thanks to its generous yield and stable payouts.
- Ticker: KEY.TO
- Forward Dividend Yield: 6.38%
- Dividend Payout Ratio: 129.73%
- Dividend Yield (12-Month Trailing): 5.88%
- Upcoming Dividend Date: Sep 29, 2023
- Market Cap: $7.58 Billion
- Forward P/E Ratio: 16.71
Pembina is one of the largest midstream players in Canada, with a diverse portfolio of operations.
Pipelines are a major part of these operations, and the company controls a network of about 4,400 km of pipeline.
This connects its own gas processing facilities from the production points, and the refined consumer-grade natural gas is then transported to the endpoints.
Pipelines are just one piece of the Keyera puzzle. The company has an impressive Natural Gas Liquids (NGL) infrastructure with 17 underground caverns for storage.
Its NGL expertise includes propane, butane, and iso-octane, which gives it access to a diverse market. The company also offers marketing services to its B2B clients.
As a stock, Keyera is a decent buy for capital preservation. It may even offer capital growth when the market conditions are right for long enough (years instead of months).
It’s a compelling investment for dividends since it offers a healthy yield and may raise its payouts in a healthy market.
- Ticker: ACO-X.TO
- Forward Dividend Yield: 4.29%
- Dividend Payout Ratio: 57.00%
- Dividend Yield (12-Month Trailing): 4.99%
- Upcoming Dividend Date: Dec 31, 2023
- Market Cap: $4.28 Billion
- Forward P/E Ratio: 10.12
As primarily a utility company, ATCO Group may look out of place on this list, but its massive 64,000 km of pipeline network has earned it a spot.
The company uses this network to serve its natural gas customers through its subsidiaries. The company owns another publicly traded utility company (Canadian Utilities).
As a utility company, ATCO offers investors more stability and resilience compared to typical pipeline stocks hailing from the energy sector. Still, its capital appreciation potential echoes the same pattern as that of other pipeline stocks, a stark contrast to other utility stocks.
Its dividends are the most compelling reason to consider this company. It offers a modestly decent dividend yield and has become an aristocrat in both Canada and the US.
- Ticker: GEI.TO
- Forward Dividend Yield: 6.97%
- Dividend Payout Ratio: 98.67%
- Dividend Yield (12-Month Trailing): 7.45%
- Upcoming Dividend Date: Jan 17, 2024
- Market Cap: $3.34 Billion
- Forward P/E Ratio: 13.09
Gibson is an energy infrastructure company that focuses mostly on petroleum liquids. Pipelines are an important part of this infrastructure, and it has over 500 km of pipeline in Canada and some in the US.
Its other major assets are also tied to energy transportation, albeit in a different way. The two terminals operating under the company offer its clients adequate storage capacity and loading capabilities (for rail transportation).
As a stock, Gibson offers modest capital appreciation, but so far, it has been uncharacteristically (for a pipeline company) vulnerable sector-wide slumps.
The upside is that it can also offer decent growth when the sector goes bullish. The dividends are the highlight of the stock thanks to a usually mouthwatering yield.
Secure Energy Services is not a pipeline stock per se. It offers a variety of energy, wastewater, and environmental solutions.
However, the bulk of its energy solutions focuses on midstream services, including a variety of pipeline services. These services range from analyzing the integrity of pipelines to their decommissioning.
The stock is more in sync with upstream/downstream energy stocks than other pipeline stocks. So if the sector is bullish, you may benefit from powerful capital appreciation.
An example would be its 470% growth between Oct 2020 and Mar 2023. The dividend yield is also quite attractive.
The best pipeline stocks in Canada are often counted among the best energy stocks for a number of reasons, starting with the stability its business model promises.
In order to understand how it differs from upstream and downstream energy companies, you have to look at it from the pricing perspective. Let’s say an upstream company extracts oil at $20 per barrel. If the price per barrel moves up, the profit margin goes up.
If the price goes down, even if the company doesn’t go into a loss, the profit margin is gutted. The same is true (from a different perspective) for downstream companies.
In contrast, price fluctuations may not impact midstream or pipeline companies as much. These companies usually have long-term contracts at predetermined prices.
So whether the current price per barrel is $70 or $90, they may get paid the same to transport it from point A to point B. The price does impact pipeline companies and their finances when contracts are renegotiated or when upstream companies cut down production.
You should also take into account the following three factors when investing in the pipeline stock:
- Dividends: Most pipeline stocks offer generous yields, and more than half of them are dividend aristocrats. Dividends are the primary reason to consider these stocks.
- Capital Appreciation: Pipeline stocks are slow to move in either direction, so in order to see considerable capital appreciation, you may have to hold the right pipeline stocks for at least a decade or so.
- Stability and Resilience: The business model of pipeline companies offers them a high degree of operational and financial stability. This is reflected in the resilience of pipeline stocks during crashes and weak markets. But it’s a double-edged sword since it also hinders rapid rise in the bullish market. An example would be the minimal growth of most pipeline stocks in the post-pandemic market (Between the last quarter of 2020 and 2022).
Risks and Challenges Associated with Pipeline Stocks
Regulatory environment and governmental policies
The regulatory environment and governmental policies play a crucial role in the pipeline industry, with stringent regulatory approval processes often leading to lengthy permitting procedures that can impact project timelines and costs.
Changes in environmental regulations can result in increased compliance costs and affect future pipeline expansion projects. Disputes over indigenous rights and land ownership can cause delays in project development and pose reputational risks for pipeline companies.
Carbon pricing policies may influence the industry’s profitability, as pipeline operators may need to account for the costs associated with carbon emissions.
Commodity price fluctuations
Pipeline companies’ revenues can be significantly influenced by global oil and gas prices, as they are dependent on the commodity markets, where supply and demand imbalances can impact profitability in the long-run.
The long-term trend towards renewable energy sources may reduce the demand for fossil fuels, presenting challenges for pipeline companies to adapt their business models and maintain profitability.
Moreover, currency fluctuations can also impact the financial performance of pipeline companies, as exchange rate risks may affect their revenues and expenses. To mitigate these risks, some companies employ hedging strategies to reduce the impact of currency fluctuations on their operations.
Public opposition and environmental concerns
Public opposition to pipeline projects is often driven by concerns over environmental impacts, such as the potential for oil spills, contamination of water sources, and greenhouse gas emissions.
This opposition can lead to delays in project approvals, increased costs, and even project cancellations. In addition, pipeline companies face the challenge of addressing and mitigating these environmental concerns while maintaining profitability.
Demonstrating commitment to responsible and sustainable operations and investing in new technologies to reduce environmental impacts can be key to gaining public support and ensuring long-term success in the industry.
The consequences may range from losing publicity points and experiencing a stock dip because a line developed a leak to the inability to expand a pipeline to its rightful destination due to a court order, which may render all the capital cost invested in the pipeline to that point useless.
Geopolitical risks and global economic factors
Geopolitical risks and global economic factors can significantly impact the pipeline industry. Conflicts, trade wars, and shifts in international relations can lead to changes in global energy demand and supply dynamics, which may affect the revenues and profitability of pipeline companies.
Global economic factors such as recessions, inflation, and changes in interest rates can impact the financing and development of pipeline projects and the overall demand for energy.
Pipeline companies need to monitor and adapt to these risks and uncertainties while implementing risk management strategies to minimize their exposure to these factors and ensure the long-term stability of their operations.
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The energy sector in Canada has gone through multiple transformational phases between the great recession and the post-COVID recession.
The best pipeline stocks in Canada have proved themselves to be stable compared to the rest of the sector, falling slowly during market crashes and sustaining, even growing their payouts even in the worst market conditions.
So if you are planning on investing in energy stocks, pipeline stocks are a subsegment worth considering before the others.
If you want to balance out the ESG profile of your portfolio after adding a few pipeline stocks, you may consider investing in these renewable energy companies.