Dec 15, 2020 (Baystreet.ca via COMTEX) -- It's been a tough year for energy pipelines that carry oil and gas from source points to distribution and export terminals. In recent weeks, along with a general rally in energy-related stocks, the worst seems to have passed for the key pipeline companies upon which we rely for energy distribution in this country. Energy Transfer, /zigman2/quotes/210213433/composite ET +1.31% , and Enbridge, NYSE: ENB) - two of the biggest pipeline operators - have seen 25% gains in the last 6-weeks.
In recent times, with the travails that have beset the pipeline business, I've been wondering about the intrinsic value of this crucial distribution network. As we will discuss later in this article, growth in this business has been stunted in recent times by court actions in the case of Energy Transfer and regulatory setbacks in the case of Enbridge. There has also been a perception that this business could be impaired by the decline in produced oil and gas volumes this year, which could reduce demand for their services. And, to put a finer point on the depressed valuations, what was their relationship to a realistic value on existing infrastructure?
What is the value of a pipeline that's been built and installed? And, to add another aspect, one that's is not under threat of being arbitrarily shut down by some judicial or regulatory agency? Are these companies, with huge installed bases carrying the energy we all need, being given proper credit in their valuations for the worth of their infrastructure? Recent events have left me thinking there is unrealized value in these companies. We will discuss a relative basis for valuing this hardware that was set recently by none other than Warren Buffett with his purchase of the pipeline assets of Dominion Energy, /zigman2/quotes/206853976/composite D -1.27% .
Building a new pipeline? Not in my backyard!
I can't think of a less appealing job, frankly, than taking on the permitting and construction of a new pipeline. And I am an old mud engineer (ask anyone on a drilling rig whose fault any problem is. It's always the mud!). As soon as you announce a new one, Indigenous tribes and regulators are going to have you dead in their sights. A pipeline is the ultimate, Not In My Backyard-NIMBY project. No one wants to be able to see one. There is always the human risk of an explosion and contamination of drinking water supplies etcetera.
Apparently, the people who run pipeline companies are starting to agree with me. This year, as much as 30% of the original CAPEX dedicated to building pipelines has been deferred or canceled, according to a recent WSJ article. Some of this is probably a lessening need for some of this infrastructure that was planned a few years ago, when the energy market was roaring, and all you heard was "takeaway capacity limitations." It's also likely a case of fatigue at fighting every mile in court.
In addition to the problems mentioned above with Energy Transfer's Dakota Access Pipeline and Enbridge's Line 5 under the Mackinac, there have been a number of well-publicized cases of pipeline operating companies doing just that - giving up. An article in Reuters called it the "end of an era." One prime case of an operator having spent major bucks and years of time trying to get a pipeline permitted is The Atlantic Coast Pipeline that was being built jointly by Duke Energy, (DUK), and Dominion Energy, (D) to carry West Virginia gas to the East Coast markets. After 7-years, they just threw in the towel. Here's a choice comment from the Reuters article-
"The latest setbacks have increased the difficulty for developers of billions of dollars' worth of pipeline projects in getting needed permits and community support. The oil industry says the pipelines are needed to expand oil and gas production and deliver it to fuel-hungry markets, but a rising chorus of critics argue they pose an unacceptable future risk to climate, air, and water.
Any company that is going to look to invest that kind of money into our infrastructure is really going to have to take a hard look," said Craig Stevens, spokesman for Grow America's Infrastructure Now, a coalition comprised mainly of chambers of commerce and energy associations."