On Wednesday Energy Transfer (ET) announced plans to extend its Transwestern Pipeline from Waha in the Permian Basin in west Texas to Phoenix. The Desert Southwest expansion project will improve the egress of natural gas from a region where it’s often produced along with crude oil, which is generally more desirable. The pipeline will support the growing need for gas-generated electricity.

ET expects it to cost $5.3 BN to cover 516 miles, which at $10 million per mile is quite expensive. For example, Kinder Morgan’s Gulf Coast Express announced in 2017 and built in partnership with DCP Midstream cost around $4 million per mile.

The Rockies Express Pipeline built by Tallgrass is one of the longest gas pipelines built in the last 15 years and came in at $3.5 Million per mile.

The Rio Bravo Gas Pipeline will feed NextDecade’s LNG export terminal. That will cost almost $16 million per mile, but it has greater capacity than most at 4.5 Billion Cubic Feet per Day.

Mountain Valley Pipeline was subject to interminable legal challenges which slowed construction and caused the cost to soar. It finally cost around $26 million per mile and required an act of Congress to complete.

Pipelines are getting more expensive, but ET has sufficient long-term commitments from investment grade customers to proceed. Kinder Morgan (KMI) has expressed interest in a greenfield project to supply gas to the southwest. Those plans are now in doubt because of Desert Southwest.

KMI’s stock closed 4.5% lower on the day of ET’s announcement, as the market adjusted down the odds of KMI embarking on a competing project. To anyone familiar with KMI’s track record at allocating capital, this was a perverse reaction. The company is the worst in the industry at deploying shareholder capital profitably (see Not All Growth Projects Are Good).

The possibility that KMI will abandon plans to build a gas pipeline should have been cheered by astute investors aware of the history. Less KMI capex means less chance to invest at a return on invested capital below the company’s cost of capital. ET has helped KMI from building on their poor track record. KMI investors should be happy.

We have two have funds that seek to profit from this environment:

Energy Mutual Fund

Energy ETF

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