There are few publicly traded businesses that have better economics than oil and gas pipelines. The business is simple. The pipeline companies dig a hole, lay some pipe, and collect a relatively stable revenue stream that is often inflation adjusted. The barriers-to-entry are high, and maintenance capital spending requirements are low.
The downside: investors in pipelines have to periodically deal with their fellow shareholders losing their heads and causing unnecessary price volatility. The most recent bout of volatility came last fall when the Alerian MLP index lost 40% over about a six month period ending in February.
How have the pipes performed since that February low? The Alerian MLP index is up over 55%. It would seem that the savvy trade during this bout of volatility was to be a buyer when everybody else was a seller.
What is the savvy trade in pipeline stocks today?
According to Enbridge Energy, one of North America’s leading energy transportation companies, it is to be a buyer. Enbridge is buying Houston based Spectra Energy to create the largest energy infrastructure company in North America.
With low interest rates and still reasonable valuations in the pipeline sector, the Enbridge acquisition could very well be the start of a new consolidation trend in the pipeline sector? You’ll want to participate here.
Keep the new Enbridge on your radar. Below is more on the details of the merger from the press release:
Enbridge and Spectra Energy to Combine to Create North America’s Premier Energy Infrastructure Company with C$165 Billion Enterprise Value
September 6, 2016
Transaction creates increased scale, asset diversity, financial flexibility and an industry leading secured project portfolio and development project inventory
Highlights:
- Creates largest energy infrastructure company in North America with C$1651 billion (US$127 billion) enterprise value
- Anticipated 15 percent annualized dividend increase in 2017 and annual 10-12 percent dividend growth thereafter through 2024. Industry leading secured project and risked development inventory of C$74 billion (US$57 billion) with C$26 billion (US$20 billion) currently in execution
- Complementary and diversified asset base to increase customer service offerings and optionality
- Enhanced ability to pursue projects that will improve customer access and service
- Strengthens investment grade balance sheet
- 96 percent of cash flow generated by cost-of-service, take-or-pay, or fee-based contracts
- Industry-leading total return potential
Jeremy Jones, CFA
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