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Surging crude prices pinch Inter Pipeline's European storage business

The rally in world crude prices has put a crimp in the European storage business of Inter Pipeline Ltd. as traders pull petroleum products bought at lower costs to take advantage of the uptick.

Funds from operations from the terminals slipped nearly 28% year-over-year in the fourth quarter and things could get worse in 2018, CFO Brent Heagy said on a Feb. 16 conference call. Lower storage profits are a function of rising prices. "It's just the way the business works, particularly for some of the Danish terminals," he said.

Inter Pipeline, which is based in Calgary, Alberta, owns petroleum terminals in several European countries including Sweden, the U.K. and Denmark. When the price of petroleum futures exceeds the spot price, which is known as contango, demand for space at terminals soars as traders seek to lock in profits using storage. When futures prices are not high enough to warrant the cost of storage, demand wanes. In the fourth quarter of 2017, Inter Pipeline's European terminals operated at 91% of capacity, down from 99% in the year-earlier quarter. CEO Christian Bayle said he remains bullish on the business.

"There's a couple of things about the storage business that we really like," Bayle said on the conference call. "It's entirely fee-for-service. It's really hardcore energy infrastructure that's extremely difficult to replicate. And we're operating in countries where the business environment is strong and constructive."

The slowdown in terminals was more than offset by the company's Canadian pipeline and NGL businesses. In the company's NGL processing segment funds from operations, a key financial metric for midstream operators, jumped 40% to C$91 million in the fourth quarter of 2017 compared with the year-earlier period. The company decided in December 2017 to go ahead with a C$3.5 billion petrochemical plant in Alberta that will be known as Heartland.

"This [C]$3.5 billion investment represents the largest organic growth project in our history," Bayle said. "The Heartland Complex is highly complementary to our existing liquids processing activities and should increase our annual EBITDA by approximately [C]$450 million to [C]$500 million per year when it enters commercial service in late 2021.

Separately on Feb. 15, Inter Pipeline reported net income of C$141.9 million, or 37 Canadian cents per share, for the third quarter of 2017, up from C$125.8 million, or 35 cents per share, in the year-ago period. For the full year, Inter Pipeline reported net income of C$526.7 million, or C$1.41 per share, up from 2016's C$449.7 million, or C$1.31 per share.