Pipeline Players Are the Next Wave in Oil Boom
Talk to oil and gas industry veterans and they'll tell you, the U.S. is in the midst of an energy renaissance, with national oil production at a 12 year high, thanks to the boom in Shale oil production in places like North Dakota.
"It's an amazing amount of crude that's available," says Mike Creel, CEO of Enterprise Product Partners . " I've never seen anything like this."
What has lagged until now is a way to feed all that crude being produced in new parts of the country down to the crude to the major Gulf Coast refiners in Texas and Louisiana, which process nearly half of the oil in the U.S.
"You need more pipeline infrastructure. You need more storage and more midstream services," says Creel, and his firm is reaping the benefits of the new infrastructure demand.
THE BUILDING BOOM
Enterprise Product Partners along with its partner Enbridge have secured multi-year contracts from producers to reverse the flow of the Seaway Pipeline to run from the nation's oil hub in Cushing, Oklahoma down to Texas. Even before the pipeline goes on line in June, the companies have secured enough commitments to build a twin line, which will ultimately provide capacity to transport up to 800,000 barrels of oil a day.
The $4 billion Seaway reversal and expansion project is expected to be completed by the end of 2014. But analysts see the building boom lasting into the end of the decade.
"All across America, we estimate $10 to $20 billion per year to be spent on energy related infrastructure," says Curt Launer, an oil infrastructure analyst with Deutsche Bank . "And we could actually see it going longer than that."
TransCanada is also moving forward with the build out of the Gulf leg of its Keystone XL pipeline, which will ultimately provide over 800,000 barrels a day of capacity from Cushing to Texas, while it continues to wait for U.S. approval to construct the northern portion of the pipeline which would begin across the border in Canada.
The Keystone gulf pipeline is also expected to come on line by 2014. Along with the Seaway expansion, it will mean more than 1.5 million barrels a day of new capacity to feed oil production from North Dakota and the mid-continent to refiners on the Gulf.
"I don't think it's going to be enough," says Darren Horowitz, an energy pipeline analyst with Raymond James, who says Shale oil production is already growing faster than expected despite current pipeline constraints. Once the infrastructure starts to come online, production will likely ramp up even more.
"I don't think the existing oil pipelines that are permitted will be enough to keep up with production."
AFTER THE BUILD OUT, THE REVENUE STREAM
Pipelines work much like a toll road. Users pay a fee to have their oil transported through the pipes. For oil producers, pipeline transport costs range from $1-$2 per barrel, compared to more than $10 to ship crude via rail.
With multi-year contracts for projects already underway, analysts say the pipeline players are looking at steady stream of revenue.
Deutsche Bank analyst Curt Launer says Enterprise Product Partners and Enbridge are among the larger pipeline and storage firms who are benefiting from the new demand for infrastructure to move northern crude produced in the U.S. and Canada to the Gulf Coast.
In a note to clients, he also recommended SemGroup a smaller player which he says has significant leverage when it comes to oil pipelines from the Rockies.
The Dividend Play: Energy Master Limited Partnerships
Launer also likes Kinder Morgan Partners, a major industry player which also has the advantage for some investors of being structured as a Master Limited Partnership, or MLP.
An MLP structure allows companies to offer a higher dividend yield, because the distributions are considered a depreciation expense, deducted form corporate profit taxes.
"We favor several of the energy-related MLPs right now," Launer says. "This is a great way to combine a tax-efficient yield plus the opportunity to participate in the development of the plays."
Plains All American and Magellan Partners have also seen their stocks benefit from the strong outlook for energy infrastructure.
Simmons and Company analyst Jeff Dietert cautions that while MLPs offer investors seeking income an attractive investment, but only while Fed continues to keep interest rates low.
"MLPs are typically at a 4-7 percent yield," Dietert explains." But in the event interest rates rise the yield would be less attractive and MLPs may come under pressure."
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