3 Pipelines to Buy and 1 to Avoid
As energy production in the U.S. and Canada continues to increase, business at your local neighborhood midstream company is booming as well. The energy industry will spend an estimated $130 billion to $210 billion expanding natural gas infrastructure alone over the next 20 years. Below are three ideas to take advantage of this trend -- and one that might be better off left alone for now.
Kinder Morgan (NYSE: KMI)
Kinder Morgan is on a roll. On Thursday, soon-to-be acquired El Paso announced it had agreed to sell its exploration and production unit to a consortium led by Apollo Global Management for $7.15 billion. This was all part of Kinder Morgan's initial plan for the merger, and the proceeds from the sale will go a long way in reducing the debt borrowed by KMI to fund the acquisition in the first place.
The Apollo deal is contingent on a successful Kinder Morgan-El Paso merger, which is expected to be finalized by the second quarter of this year.
Outside of the El Paso deal, the company announced last week that it had enough commitments to proceed with its plan to double the capacity of its Trans Mountain pipeline, which connects Alberta to the coast of British Columbia. The upgrade would boost capacity from 300,000 barrels per day to 600,000. The company will likely face environmental opposition, but has by and large managed to stay out of the spotlight regarding this particular project.
Enterprise Product Partners (NYSE: EPD)
Enterprise blew 2011 analyst expectations right out of the water. The company had an absurdly successful, record-breaking fourth quarter, growing earnings per unit by well over 100% compared to 2010. For the full year, analysts expected earnings of $0.55 per unit, and Enterprise crushed that number, reporting earnings of $0.82 per unit.
The company is currently developing two crucial projects. The first is its ATEX Express pipeline, which will carry 190,000 barrels per day of ethane from the Marcellus Shale to the Gulf Coast of Texas. The pipeline will be 1,230 miles long and is expected to begin operating in the first quarter of 2014.
The second project is the expansion of a crude oil facility in Houston. The original ECHO facility is expected to begin service in the second quarter of this year. Enterprise purchased a 37-acre tract of land adjacent to the facility for the expansion, which will increase the storage capacity of the entire project to 6 million barrels.
Earlier this year, Enterprise announced it was increasing its quarterly unit payment for the 30th consecutive quarter. It marks a 5.1% increase over the same quarterly payment from 2010, and brings the companies annualized payment up to $2.48 per unit.
Plains All American Pipeline (NYSE: PAA)
Success breeds success, and the midstream business is no exception. Plains All American Pipeline is cashing in on SandRidge Energy's (NYSE: SD) success in the Mississippi Lime region with a new 170-mile pipeline. SandRidge is the dominant company in the play, and PAA has signed a long-term agreement with the company to shuttle its black gold to Cushing, Okla.
The new pipeline will transport 175,000 barrels a day, adding much needed capacity to the region that is rich in oil. It should be up and running by the middle of next year.
This is continuing great news for a company that delivered impressive 2011 full-year results, growing revenue 32.4% year over year and increasing operating income 69.2% over the same period.
Enbridge (NYSE: ENB)
A mere five days ago, I wrote that though Enbridge disappointed on earnings and was facing major opposition to its Northern Gateway project, there was still an upside to the company. Part of that upside was the company's U.S. presence, but recent events have thrown that into question as well.
There are currently two existing pipelines that ship oil from Portland, Maine, through Quebec and onto Ontario. Enbridge and Suncor Energy want to reverse the flow of those pipelines to send crude from Alberta down to Portland, where it will be loaded onto a tanker and shipped to the Gulf of Mexico.
The hang-up here isn't that the proposed route is convoluted and ridiculous; it's that an environmental group and a Canadian citizen went to court and won a ruling that temporarily stalls the project. The flow reversal would have carried 200,000 barrels of oil a day to Maine and marks the second major roadblock to a potentially lucrative oil sands project for the company, and it is enough for me to keep my distance for now.
Pipelines are more or less impervious to volatility in oil prices, but environmental opposition has really become a force to be reckoned with. At the same time, the market is in dire need of midstream infrastructure right now, and some of these companies will be very successful going forward.
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