Companies that have any business related to energy have taken a severe beating over the past few weeks as the price of oil fell off a cliff. Pipeline operators haven’t been spared, including three Dividend Champions: TransCanada, Inter Pipeline Ltd. and Pembina Pipeline. We believe this has created an excellent investment opportunity for a number of reasons:

1. Energy consumption will grow and Canada offers an abundant supply.

Despite the current malaise in energy prices, demand for oil and gas will not slow. According to the International Energy Agency, global energy consumption will grow 33% between 2012 and 2035. The necessary increase in supply will come from various sources including renewable energy, such as wind and solar power, but most will still come from oil and gas.

Canada holds the third-largest proven oil reserves in the world (174 billion barrels of oil) and is the fifth-largest natural gas producer. According to the June 2015 forecast of the Canadian Association of Petroleum Producers (CAPP), Canada will increase its production of oil 43% until 2030. Natural gas output is expected to grow 14%.

2. Pipelines are crucial for moving oil and gas out of landlocked Canadian production areas.

The pipelines are crucial for transporting oil and gas from the landlocked production facilities in Alberta and Saskatchewan to refineries and shipping facilities on the East and West coasts of Canada and south to the U.S. Gulf Coast.

The current capacity to transport oil (pipelines plus oil by rail) out of Western Canada is around 3.8 million barrels per day. Given  estimates for growth in production until 2020, several large projects, including the Keystone XL, Trans Mountain expansion, Northern Gateway and Energy East, will be needed to match this production growth.

3. Current low energy prices will have a limited effect on short- to medium-term growth in production.

Oil and gas producers will continue to cut back on their expansion plans should energy prices remain at the current levels. But it’s unlikely production will be reduced given the operating cost of major producers, such as Suncor, is substantially below the current price of oil. This is confirmed by the CAPP forecast that oil production from current facilities and projects already under construction will continue growing another 20% until 2020.

4. Our Dividend Champions pipeline companies should be able to sustain their dividends.

Pipeline companies generally have long-term cost-of-service or fee-based contracts in place under which they extract a “toll” from producers that wish to use the pipelines. These contacts have no direct commodity exposure, although some expose the companies to the risk of lower volumes. In the longer term, producers may decide to delay or cancel new projects if persistent low oil and gas prices make expansion too expensive.

Pipeline companies may also be involved in activities such as energy product marketing or power generation that expose the business to commodity pricing risk.

Inter Pipeline gets 10% of its profit from business  that depends on energy prices, while 90% of the profit is based on longer-term contracts with no direct commodity exposure. The revenue profile of Inter Pipeline could be described as relatively low risk with limited commodity price exposure.

TransCanada gets 80% of its profits from natural gas and oil pipelines, with most of the capacity provided under long-term contracts that are not subject to commodity price fluctuations. The energy business, which provides the balance of the profit, is partly subject to commodity prices.

Pembina is the most exposed to commodity pricing, with 36% of its profit coming from commodity-related businesses and the balance from fee-for-service or cost-of service contracts. The company intends to change this by adding new capacity to increase the non-commodity related profits to 82% by 2018. This should help stabilize profits.

The cash flow generation of the pipeline companies is generally adequate, and the dividend payout ratios are low enough to provide comfort for future dividend payment even if profits decline moderately.

The balance sheets of all three companies are sound, although the debt-to-capital ratios are somewhat higher than my normal comfort level. All three also carry investment-grade ratings from Standard & Poor’s as indicated in the table.

Apart from Inter Pipeline, the other pipeline companies are working to add substantial new pipeline and infrastructure capacity over the next few years. Pembina has the largest commitment compared to the size of the company while Inter Pipeline has already done major expansions over the past few years with new capacity coming online in 2015 and 2016. Apart from the expenditure indicated in the table, TransCanada could spend much more on large projects, including Energy East and Keystone XL, should they receive approval.

Although both Pembina and TransCanada are confident that they have the necessary support from producers to use the additional capacity when completed, low energy prices could jeopardize the best-laid plans.

5. The dividend yields remain attractive.

All three companies have outstanding dividend-payment track records with growth ahead of inflation over the past 15 years and no dividend cuts or omissions even during the troubled 2008 and 2009 period. Current dividend yields are very attractive in absolute terms and also when compared to bond yields.

6. Market behaviour creates opportunities.

When panic sets in, opportunities are created for astute investors. In this case, high-quality companies that own and operate crucial infrastructure with limited exposure to commodity prices have been oversold.

 Inter Pipeline remains our preferred pipeline stock with limited direct commodity exposure and low further spending required to complete its expansions. Buy up to C$29/US$22.

TransCanada offers a high-quality asset base, an attractive yield and a low payout ratio. However, the ambitious expansion plans place a higher risk on profit growth sho uld low energy prices prevail over the next few years. We lower our price limit to C$48/US$36 to capture the additional risk.

We are less sanguine about the prospects for Pembina given the higher commodity price exposure and large-scale expansion plans. We plan to sell the stock from the Dividend Champion Portfolio when the price moves to more realistic levels.