by Aaron Levitt | January 10, 2012 9:21 am
As politicians, environmentalists and pundits continue to debate TransCanada’s (NYSE:TRP) Keystone XL pipeline, the project sits in limbo. A provision in the recent payroll tax bill that required a 60-day decision on the proposed pipeline pretty much guarantees cancellation of the project, according to the Obama administration. The $7 billion endeavor ultimately would have sent oil sands-derived crude down from Western Canada to Gulf Coast refineries.
However, while the Keystone sits fallow and attracts major newspaper headlines, the rest of the energy infrastructure and logistics sector continues to move forward. A vast variety of new pipelines, gathering systems and storage projects are on the horizon. For energy investors, these new developments have a better chance of being built and producing real cash flows for their owners.
Much like the E&P sector of the energy market, the keyword for pipeline growth is “shale.” With an abundance of energy trapped beneath various rock formations across North America, the shale boom is alive and well. Drilling activity continues to increase and rig counts are up.
However, the problem lies in gathering and moving all of that energy to end users. There currently around 328,000 miles of natural gas transmission and gathering pipelines across North America. However, that number isn’t enough to tap America’s new energy potential. According to a study by ICF International, the U.S. and Canada will require annual average midstream natural gas investment of around $8.2 billion per year, or $205.2 billion total from 2011 to 2035. This equates to around 1,400 miles of new pipeline added each year.
Spectra Energy’s (NYSE:SE) recent moves in the energy-rich Utica shale are a great example of what’s to come. The firm recently announced that it will spend more than $500 million to expand capacity on its Texas Eastern pipeline system. This is being done to handle rising natural-gas production from the Utica and Marcellus shale formations. Already, Spectra has signed agreements with American Electric Power (NYSE:AEP) and Chesapeake Energy (NYSE:CHK) to help develop 70 miles worth of new lines. Chesapeake is pursuing additional shipping capacity for its quickly growing production, while American Electric is pursuing pipeline capacity for more gas-fired power plants. These deals, along with a few other shale pipeline projects, will help support Spectra’s 3.6% dividend yield and create value for shareholders. Shares currently can be had for a forward P/E of around 17.
After spinning out its E&P operations, Williams Companies (NYSE:WMB), through its Williams Partners L.P. (NYSE:WPZ), continues to expand within the natural gas-rich Marcellus. The pipeline firm recently purchased the Laser Northeast Gathering System and other midstream businesses from Delphi Midstream Partners for approximately $750 million. This will give the company ownership of 33 miles of 16-inch natural gas pipeline and associated gathering facilities throughout Pennsylvania and southern New York. Williams plans on expanding the Laser’s gathering system, and when completed, it will be 75 miles long with a capacity of 1.3 billion cubic feet per day (Bcf/d). The pipeline expansion will cost an estimated $55 million to build. Ultimately, the acquisition will add to William’s growing scale throughout the Marcellus region. Williams yields 3.7%, while Williams Partners pays a juicy 4.8%.
Finally, the Bakken Shale, which spans throughout Montana and North Dakota, has become so prolific that it is causing a huge backlog and supply glut of shale oil. Enbridge (NYSE:ENB) already made headlines for agreeing to reverse the flow of Seaway pipeline and enabling it to move Bakken shale oil from Cushing, Okla., to refiners in the Gulf. However, the pipeline firm isn’t resting on its laurels. Canadian regulators recently approved the firm’s plans to build a new $176 million pipeline to move oil out of the underserved Bakken and Three Forks oilfields. As TransCanada’s main direct rival, Enbridge seems to be making all the right moves. Also, ENB yields a 3% dividend.
While the Keystone remains a casualty of the political process, the shale pipeline goes on. For investors, betting on pipeline sure-things ultimately will lead to big payouts down the road.
As of this writing, Aaron Levitt did not hold a position in any of the aforementioned securities.
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