A Closer Look at Investing in Pipelines

Travis Hoium, The Motley Fool
Updated

The normally quiet world of moving oil and natural gas around the country as hit the front page in recent weeks and months as investors, environmentalists, and politicians weigh in on the industry.

Some of the news has made me bullish on pipeline owners, some has me worried about their risks, and another piece is full of complicated opinions. Here's a look at what these three moves mean for shareholders and how to invest in pipelines now.

Pipelines and protests
On the surface, the Keystone XL pipeline proposed by TransCanada (NYS: TRP) looks like a no-brainer. Bring more oil in from Canada, reduce our reliance on other foreign oil, and create (by Fox News' wild statements) up to a million new jobs in the process. But there's much more to the story than that.

On the jobs front, unless the oil is going to be passed hand-to-hand from Alberta to Texas, I can't imagine how in the 1 million jobs would be created. In fact, TransCanada estimated only a few hundred long-term jobs would be created, and the short-term ones would only amount to a few thousand. The only independent study said that the net effect would be a grand total of zero jobs created.

After all, isn't that the point of a pipeline? To create infrastructure where a minimal number of people can move a massive amount of oil.

One of the major reasons people are up in arms about Keystone XL is that the tar sands oil is much less efficient and more environmentally harmful than conventional oil. It uses three barrels of water per barrel of oil, creates giant sludge pools of wastewater, and uses more energy to be refined than conventional oil. But beyond the environmental reasons, there are practical reasons that tar sands aren't a "must have" right now for the U.S.

What we seem to be overlooking in our outrage about Keystone XL is that the U.S. has done a very good job of creating jobs and drilling for oil here at home. Projects by Kodiak Oil & Gas (NYS: KOG) , Continental Resources (NYS: CLR) , and Brigham Exploration (NAS: BEXP) have helped reduce our dependence on foreign oil from 60.3% of consumption to 44% of consumption since 2005.

That rapid drop in dependence on foreign oil means we don't need to overlook problems with tar sands oil before approving a pipeline like Keystone XL. The project is on the shelf for now, and although it will be a political talking point, I don't think it's a place I would invest money right now.

Pipeline reversal
This week, oil refiners were put through the wringer when Enbridge and ConocoPhillips announced they were reversing the direction of the Seaway pipeline.

Refiners have been able to buy cheaper West Texas Intermediate, or WTI, oil versus the cost of Brent crude, and the move will likely put pressure on margins. This is just another byproduct of increased shale or tight oil drilling and expanded U.S. production. What's good for most of us isn't necessarily great for everyone.

It isn't like refiners are going to go belly-up because of this pipeline reversal, but I wouldn't be buying them now, and this shows the power that pipelines have over other parts of the oil industry.

El Paso acquisitions
What really put the stamp on the value of pipelines this month was Kinder Morgan's $38 billion buyout of El Paso, driven by the company's natural gas assets. The increased production of natural gas in the U.S. has changed the whole energy dynamic, and pipelines will play a major role in getting fuel where it needs to go.

We have so much natural gas that Cheniere Energy's (ASE: LNG) original import facility at Sabine Pass has now become a potentially huge export facility.

The best way to get natural gas to facilities like this -- and a growing network of liquefied natural gas stations from Clean Energy Fuels (NAS: CLNE) -- is, of course, by pipeline.

Considering the growth of natural gas production and the likely expansion of consumption by utilities and the transportation industry, I think this is the best way to play the industry. My top pick is Kinder Morgan's new subsidiary, El Paso Pipeline Partners (NYS: EPB) , an MLP that pays a 6% dividend and has great exposure to the natural gas market.

I'll back up this pick by giving El Paso Pipeline Partners a green thumb in My CAPS page, which you can follow here.

Foolish bottom line
Pipelines are very important to our national energy infrastructure, and with a changing supply base, they will play a growing and dynamic role in our future. But as we've seen with Keystone XL, there are advantages and disadvantages to pipelines. They run through people's backyards, farmland, and affect the environment around us. They're not guaranteed to make a buck -- but when played right, they can pay off in spades over the long term.

Interested in reading more about pipeline companies? Add your favorites to My Watchlist, which will find all of our Foolish analysis on each stock.

At the time thisarticle was published Fool contributor Travis Hoium does not have a position in any company mentioned. You can follow Travis on Twitter at @FlushDrawFool, check out his personal stock holdings or follow his CAPS picks at TMFFlushDraw.Motley Fool newsletter services have recommended buying shares of El Paso Pipeline Partners and TransCanada. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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