By Barry Schwartz
On July 26, 2010 Enbridge Pipeline 6B ruptured, leading to 20,000 barrels of crude oil spilling into Michigan’s Kalamazoo River. Only two months later, on September 9th, a rupture occurred in another Enbridge pipeline; this time the leak came from line 6A in Romeoville, Illinois. Four days after that, Enbridge (ENB) had to shut down a line near Buffalo, but it turned out to be a false alarm.
Is this just a streak of bad luck for Enbridge? Not according to a report done by Polaris Institute, which found that Enbridge has been responsible for 610 pipeline leaks between 1999 and 2008.
Unfortunately, these leaks are not surprising at all.
The entire North American energy complex is made of steel. Much of the infrastructure operates under extreme temperatures and difficult conditions. Over time, when exposed to the elements, steel will rust and corrode causing failure. There are over 350,000 miles of energy pipelines in North America, and over half of these pipelines were built prior to 1970. Both of Enbridge’s spills occurred in pipelines that were over 50 years old. With oil prices hovering near $80 a barrel, it is hard to believe that the energy industry had been in a depression for 20 years leading up to 2001. Low oil prices combined with the recent recession have provided no incentives for pipeline distributors and energy producers to upgrade their aging assets. But they may no longer have a choice. It is likely that over 100,000 miles of pipelines are in dire need of replacement, and a couple of Canadian companies, whose stocks have underperformed this year, actually stand to benefit:
Thompson Creek Metals (TC) is the largest pure play producer of molybdenum in North America. molybdenum, or moly for short, has one of the highest melting points of any element and does not expand, contract, harden or soften under extreme temperatures. Moly currently trades at $15.50 a pound—a far cry from the $30 a pound price reached in 2006. The recession had a punishing effect on moly demand, but with China now limiting moly exports, the price has begun to firm. Thompson plans to increase moly production by 15% year and has plans to expand and start new mines in the coming years. The company is debt-free and should earn in excess of $1 per share this year.
Shawcor (OTCPK:SAWLF) manufactures and sells pipeline coating equipment to the oil and gas industry. 2010 was a challenging year for the company, as projects have been slow to materialize. In its latest quarter, Shawcor revealed that its order backlog has improved, and 2011 should show a meaningful improvement in earnings. Shaw stands to benefit from new pipeline projects announced by TransCanada and Imperial Oil, and it has recently started selling a polyethylene pipe product that offers an alternative to the traditional steel pipe.
We have been adding Thompson Creek’s stock to our client accounts this year and we are patiently waiting for a pullback on Shawcor to the $25 range before taking a position.
Disclosure: Author owns shares in Thompson Creek.