Going Bargain Hunting And Spotting The Black Sheep Among Intermediate Pipeline Companies

Includes: EEP, EPB, MWE, OKE, OKS
by: Value Digger

The advent of horizontal drilling and hydraulic fracturing (fracking) brought about a shale revolution that unleashed previously untouchable reserves and boosted U.S. production of the fuel to a record high. Worldwide oil and gas reserves previously inaccessible or too costly to tap are now within reach.

I analyzed here, here, and here the "Silver Bullets" of the North American energy grid. These ongoing pipeline projects are going to be the lifeblood of economic growth for North America for the next years. The consistent unemployment drop in the U.S. during the last 12 months has not happened accidentally, but it occurs thanks to the widespread effects of this pipeline revolution on several sectors of the U.S. economy. The primary beneficiaries of this ongoing pipeline boom were also analyzed here, here, and here.

However, all fingers are not equal. Some companies in the pipelines sector are more undervalued than others, either because they have more promising prospects or they have lower ratios and better fundamentals or both. Due to their attractive valuations, some of these companies can also become acquisition targets as the M&A activity in this sector is not dead at all.

After all, the upside potential for some companies is stronger than others. There are many pipelines players that go unnoticed just because there is so much scattered information about them here and there. As I could not find something similar in another online publication, I wrote this series in order to uncover the undervalued pipeline players of North America, and provide a capital allocation strategy at the end.

In this series, I start with the intermediate players of the sector. The major and the small players will follow. I determine intermediate players to be those with market caps from ~$5 billion up to ~$15 billion currently. Once I am done with these three groups, I'll unearth some additional players, which are brand new entrants into this sector and currently fly under the radar.

Mergers and Acquisitions Deals

To prove my saying that the M&A activity in the pipelines sector is not dead, I'll provide a quick summary of some recent deals:

1) In early 2013, Kinder Morgan Energy Partners (NYSE:KMP) acquired Copano Energy LLC, which has interests in about 6,900 miles of pipelines and nine plants.

2) In late 2011, Kinder Morgan acquired El Paso Corporation, creating the largest U.S. natural gas pipeline network.

3) In early 2012, Pembina Pipelines (NYSE:PBA) acquired Provident Energy's natural gas liquids extraction, storage and transportation services to its own network.

4) In 2012, Energy Transfer Partners (NYSE:ETP) acquired Sunoco's 7,900 miles of crude-oil and refined-fuel pipelines, which will give the Dallas-based company a toehold in the Marcellus and Utica Shale regions in Pennsylvania and Ohio.

5) In 2011, Energy Transfer Equity (NYSE:ETE) acquired Southern Union Group, making it one of the largest natural-gas transporter in the U.S.

6) In 2012, Targa Resources Partners (NYSE:NGLS) acquired Saddle Butte Pipeline, LLC's ownership of its Williston Basin crude oil pipeline and terminal system and its natural gas gathering and processing operations for cash consideration of $950 million.

7) Few months ago, NuStar Energy (NYSE:NS) acquired TexStar, whose midstream assets are in the Eagle Ford Shale region.

Let the Numbers Speak for Themselves

Now that the annual reports are out, let's check the key metrics of the first five intermediate pipeline companies of my database:




















































EV: Enterprise Value; CF: Annual Cash Flow; EQ: Stockholder Equity

ONEOK (NYSE:OKE) has high P/E and PBV, despite the facts that the company is heavily leveraged and has a low operating margin. The low operating margin is a characteristic for ONEOK Partners (NYSE:OKS) too, which is priced with a more decent valuation than ONEOK.

MarkWest Energy Partners (NYSE:MWE) is also richly priced, although its balance sheet is not superior to the others. El Paso Pipeline Partners (NYSE:EPB) and Enbridge Energy Partners (NYSE:EEP) share decent metrics. El Paso has an outstanding operating margin and the current dividend yield of Enbridge is very generous. With interest rates at historically low levels, the income seekers will definitely like Enbridge, which also carries a low PBV.

Potential Upside Drivers

To give a more complete idea for the aforementioned companies, I will also provide some significant growth catalysts for each one of them on a going forward basis.

Enbridge Energy Partners participates in the Light Oil Access Program, which is a $6.2 billion project that aims to ease congestion in the U.S. Midwest refining hub and move oil from Canada to the U.S. refineries, adding 400,000 bopd to the existing network. The Light Oil Program will be completed by 2016. The company also participates in the Texas Express NGL pipeline project (280,000 bopd), which will be in service in Q3 2013. Additionally, Enbridge completed recently its Bakken project (145,000 bopd) which reversed and expanded an existing pipeline, running from Berthold, N.D., to Steelman, Saskatchewan, and constructed a new 16-inch pipeline from a new terminal near Steelman to the Enbridge Pipelines Inc. mainline terminal near Cromer, Manitoba.

ONEOK Partners' major project is the Bakken NGL pipeline that will transport NGLs from the Bakken Shale in the Williston Basin to an interconnection with the company's 50% owned Overland Pass Pipeline in Colorado. It is expected to be in service in Q1 2013, and its planned expansion is expected to be completed by Q3 2014. The company also builds two more NGL pipelines, Sterling III (193,000 bopd) and Hutchinson, that will be completed in late 2013 and 2015, respectively. It is also worth noting that ONEOK Partners does not own any oil pipelines, but it has only natural gas and NGL pipelines instead.

El Paso does not have any major project going forward. The company's latest deal was in May 2012 when it acquired the remaining 14% interest in Colorado Interstate Gas Company, L.L.C. and all of Cheyenne Plains Investment Company, L.L.C., which owns Cheyenne Plains Gas Pipeline Company, L.L.C. El Paso has only natural gas pipelines.

During the last few months, MarkWest Energy Partners has signed agreements with four producers in the Utica shale, including PDC Energy (NASDAQ:PDCE) and Gulfport Energy (NASDAQ:GPOR). Those are excellent short candidates because they are two of the most overvalued energy companies for the reasons mentioned here and here. According to these agreements, MarkWest plans to construct natural gas processing infrastructure by Q3 2013. On a final note, MarkWest Energy Partners is primarily a natural gas and NGL pipeline company with a small exposure to the oil transportation.

Bottom Line

There are more intermediate pipeline companies coming. Once I provide the data and the related information for all the intermediate players, I'll express my opinion about the undervalued and the overvalued ones along with my allocation strategy.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Disclaimer: Data, facts, and premises were determined through review of public documents, SEC filings, news releases, and transcripts. The conclusions are my own. Readers may come to different conclusions using the same information. This analysis is not intended to offer investment advice to buy or sell specific stocks.