Partnering with Pipeline Protesters

Suppose that the owner of a pipeline operating at 100% capacity opposed the construction by a competitor seeking to meet unsatisfied demand. Or consider two operators of competing pipelines that agree to refrain from adding needed capacity. Such behavior would be anti-competitive, hurting consumers but good for the pipeline operators and their owners. Scarcity of pipeline capacity would allow higher tariffs and curtailed investment in new projects. Investors would cheer.

Pipeline Protesters Unite

In many ways, the efforts of environmental extremists to oppose new pipeline construction has the same effect as if the pipeline operators themselves declined to invest in meeting new demand. Con Edison has placed a moratorium on new gas hookups across most of Westchester County, because of the inability to bring more gas into New York State.

Over the last decade, New York’s residential gas consumption has jumped by 20%, and electricity generation has become increasingly dependent on gas-fired generators. When the state retires its two Indian Point nuclear reactors in 2020 and 2021, it will need to find a replacement for 25% of the power for New York City and Westchester county. Anti-nuclear groups call for renewables to replace the lost power, but that may be difficult as non-hydroelectric renewables account for just 6% of the current mix.  Natural gas provides the largest share at 35%.

Category New York Net Electricity Generation thousand MWh % of Electric Mix
Natural Gas-Fired 3,343 35%
Nuclear 2,796 29%
Hydroelectric 2,710 28%
Nonhydroelectric Renewables 608 6%
Coal-Fired 66 1%
Petroleum-Fired 12 0%

Opponents of new pipelines want to impede consumption of natural gas in their quixotic effort to combat climate change. Although they would appear to share little common ground with pipeline investors, their success reduces the backlog of new projects, thereby lowering the sector’s capex. Perversely, pipeline investors complaining about poor capital discipline are being helped by environmental activists.

Natural gas demand is growing across the U.S., and globally. U.S. crude oil is gaining market share and meeting most of the growth in demand, which is largely from developing countries. The midstream energy infrastructure sector continues to plan new projects to transport America’s growing output. Although growth capex probably peaked last year, substantial investments are planned this year. Williams Companies (WMB) estimates $2.4BN in spending on new projects, including their proposed natural gas pipeline across New York harbor that was recently rejected.

Growth capex is the chief headwind to generating higher Free Cash Flow (FCF), a metric broadly familiar to generalist equity investors and likely to draw non-traditional buyers once FCF yields exceed the S&P500.

Moreover, recognizing the strength of opposition to new construction allows pipeline operators to enjoy stronger pricing supported by relative scarcity. They have a convenient excuse for their customers and regulators to justify profitable bottlenecks and constrained capacity. If the industry sought to create such conditions itself, an anti-trust investigation would surely follow. In fact, environmental opposition is providing the political cover to seek oligopolistic profits.

Building new infrastructure is in the DNA of every midstream management company. Their dislike of the Sierra Club is visceral. Investors have reflexively joined the criticism of those who would impede customers’ access to more oil and gas.

But on reflection, while we disagree with the virtue-signaling that governs much of the anti-carbon movement, we’ve concluded that, as investors in midstream energy infrastructure wanting higher FCF, our interests are more aligned than with company managements.

We want fewer new pipelines too. MLP investors might consider joining the next protest. The outcome could be better than you think.

Gas Pipelines having Problems Gets Built? Owner Description
Atlantic Coast Coin flip Dominion, Duke, Piedmont, Southern WV  to VA & NC
Constitution Long shot Williams, Cabot, Piedmont, WGL PA to NY
Mountain Valley Perhaps EQM, NextEra, Con Edison,  WGL, RGC WV to Southern VA
Northeast Supply Enhancement Doubtful Williams PA to NYC

We are invested in WMB.

SL Advisors is the sub-advisor to the Catalyst MLP & Infrastructure Fund.  To learn more about the Fund,  please click here.

SL Advisors is also the advisor to an ETF (USAIETF.com).

 

Print Friendly, PDF & Email

Important Disclosures

The information provided is for informational purposes only and investors should determine for themselves whether a particular service, security or product is suitable for their investment needs. The information contained herein is not complete, may not be current, is subject to change, and is subject to, and qualified in its entirety by, the more complete disclosures, risk factors and other terms that are contained in the disclosure, prospectus, and offering. Certain information herein has been obtained from third party sources and, although believed to be reliable, has not been independently verified and its accuracy or completeness cannot be guaranteed. No representation is made with respect to the accuracy,  completeness or timeliness of this information. Nothing provided on this site constitutes tax advice. Individuals should seek the advice of their own tax advisor for specific information regarding tax consequences of investments.  Investments in securities entail risk and are not suitable for all investors. This site is not a recommendation nor an offer to sell (or solicitation of an offer to buy) securities in the United States or in any other jurisdiction.

References to indexes and benchmarks are hypothetical illustrations of aggregate returns and do not reflect the performance of any actual investment. Investors cannot invest in an index and do not reflect the deduction of the advisor’s fees or other trading expenses. There can be no assurance that current investments will be profitable. Actual realized returns will depend on, among other factors, the value of assets and market conditions at the time of disposition, any related transaction costs, and the timing of the purchase. Indexes and benchmarks may not directly correlate or only partially relate to portfolios managed by SL Advisors as they have different underlying investments and may use different strategies or have different objectives than portfolios managed by SL Advisors (e.g. The Alerian index is a group MLP securities in the oil and gas industries. Portfolios may not include the same investments that are included in the Alerian Index. The S & P Index does not directly relate to investment strategies managed by SL Advisers.)

This site may contain forward-looking statements relating to the objectives, opportunities, and the future performance of the U.S. market generally. Forward-looking statements may be identified by the use of such words as; “believe,” “expect,” “anticipate,” “should,” “planned,” “estimated,” “potential” and other similar terms. Examples of forward-looking statements include, but are not limited to, estimates with respect to financial condition, results of operations, and success or lack of success of any particular investment strategy. All are subject to various factors, including, but not limited to general and local economic conditions, changing levels of competition within certain industries and markets, changes in interest rates, changes in legislation or regulation, and other economic, competitive, governmental, regulatory and technological factors affecting a portfolio’s operations that could cause actual results to differ materially from projected results. Such statements are forward-looking in nature and involves a number of known and unknown risks, uncertainties and other factors, and accordingly, actual results may differ materially from those reflected or contemplated in such forward-looking statements. Prospective investors are cautioned not to place undue reliance on any forward-looking statements or examples. None of SL Advisors LLC or any of its affiliates or principals nor any other individual or entity assumes any obligation to update any forward-looking statements as a result of new information, subsequent events or any other circumstances. All statements made herein speak only as of the date that they were made. r

Certain hyperlinks or referenced websites on the Site, if any, are for your convenience and forward you to third parties’ websites, which generally are recognized by their top level domain name. Any descriptions of, references to, or links to other products, publications or services does not constitute an endorsement, authorization, sponsorship by or affiliation with SL Advisors LLC with respect to any linked site or its sponsor, unless expressly stated by SL Advisors LLC. Any such information, products or sites have not necessarily been reviewed by SL Advisors LLC and are provided or maintained by third parties over whom SL Advisors LLC exercise no control. SL Advisors LLC expressly disclaim any responsibility for the content, the accuracy of the information, and/or quality of products or services provided by or advertised on these third-party sites.

All investment strategies have the potential for profit or loss. Different types of investments involve varying degrees of risk, and there can be no assurance that any specific investment will be suitable or profitable for a client’s investment portfolio.

Past performance of the American Energy Independence Index is not indicative of future returns.

Print Friendly, PDF & Email
1 reply
  1. ROBERT ROBINSON
    ROBERT ROBINSON says:

    GOOD POINT BUT THEN THE GROWTH CASH FLOWS IS TRUNCATED-AND LIKE FOR EXAMPLE TRANSCANADA WITH A 5 % YIELD AND A 10 % DIVIDEND GROWTH(AS A RESULT OF NEW CAPEX) YOU WILL GET A TRUNCATED GROWTH MODEL -WHICH IN TURN WILL RESULT IN A LOWER MULTIPLE AND LOWER STOCK PRICE!!!
    LIKE TO HEAR YOUR RESPONSE.

    Reply

Trackbacks & Pingbacks

Leave a Reply

Want to join the discussion?
Feel free to contribute!

Leave a Reply

Your email address will not be published.

This site uses Akismet to reduce spam. Learn how your comment data is processed.