Don’t Pull The Plug On Pipelines
Summary
- Excellent opportunities await investors in the safest modality to transport the energy we need: pipelines.
- Pipeline operators will be an integral component to our recovery and blossoming energy transition.
- Two great buys right now are Phillips 66’s MLP (NYSE:PSXP) and Enterprise Products Partners (NYSE:EPD).
- Most exciting, however, is Energy Transfer Partners (NYSE:ET). With average five-year EBIT growthof 20.47% and a 83,000-mile pipeline network, now is the time for long-term consideration at a discounted price.
- Investors should be cautious about misinformation on ET. I believe false claims are not only having a material impact on the stock currently, but also holding back ET’s potential.
Financial institutions and individual investors alike are increasingly weighing climate risk when analyzing their lending practices and portfolios. Energy infrastructure, namely, the industry’s midstream segment, is a sub-sector that is top of mind for many when undertaking this due diligence. While certain banks have begun to initiate a new type of “red lining” – curtailing or ceasing their lending to legal businesses that are not woke (e.g., gun manufacturers, private prisons, energy companies) – do not let the noise mislead you. Excellent opportunities await investors in the safest modality to transport the energy we need: pipelines.
As the economy looks set to make a strong rebound, we have seen energy prices rise in tandem. No matter what environmental, social, and governance (ESG) metrics one uses, or opposition is heard from green activists, it is clear that pipeline operators will be an integral component to our recovery and blossoming energy transition.
Two great buys right now are Phillips 66’s MLP (NYSE:PSXP) and Enterprise Products Partners (NYSE:EPD). As the one-month chart here shows, PSXP is hitting its stride after a significant drop last summer, slipping more than 40% from June 1 until Labor Day.
Additionally, EPD is currently undervalued. The company’s 7.8% yield is also compelling. As for future growth potential, moreover, EPD’s exposure to natural gas and natural gas liquids (two if its four business divisions) are primed to help boost EPD as natural gas is further embraced as an important “bridge” fuel. And as the company positions itself deeper into petrochemicals, the upside to its valuation could be as high as 18%.
Source: Morningstar
Most exciting, however, is Energy Transfer Partners (NYSE:ET). With average five-year EBIT growth of 20.47%, now is a great time to buy at a discounted price. Last month’s EPS miss of $0.08 should not be a deterrent. ET’s 83,000-mile pipeline network will be key to moving the energy we need to fuel our recovery. Investors stand to benefit from this increased demand.
Unfortunately, there has been quite a bit of misinformation on ET circulating as of late, especially concerning its Dakota Access (DAPL) project. Investors should be forewarned, as these false claims, I believe, are not only having a material impact on the stock currently, but also holding back ET’s potential. If the WSB/Reddit saga as taught us anything, it is that online chatter, true or not, has market power.
I politely take issue, for example, with SA contributor Long Player, who on more than one occasion (see here and here) has incorrectly stated that DAPL has been operating without a permit. This is not true. The Dakota Access Pipeline in fact is operating properly with permits in each state it traverses (North Dakota, South Dakota, Iowa, and Illinois), and has been doing so for the past four years. Long Player asserts, “The DAPL easement, an important permit for being on federal land and going under a lake (or river), has remained voided.” I am not lawyer, but as someone with investing and finance experience from early stage to billion-dollar companies in industrials, energy, and transportation, I can share this: an easement is not a permit. For the record, the actual legal issue surrounding DAPL pertains to a U.S. Army Corps of Engineers land easement in North Dakota, situated near Lake Oahe. It has nothing to do with a permit. Facts matter, especially when deploying capital.
What is more, Long Player’s claim of a “voided permit” is simply contradictory to court ruling. Again, here is the fact: a decision by the U.S. Court of Appeals to halt a circuit court judge’s shutdown order this past August has allowed the pipeline to legally maintain its operations. In this light, it is hoped that those behind ET’s roughly 40,000,000 shares short have based their decisions on fundamentals, good old-fashioned homework, and where they believe the stock is going – not this misinformation.
There is substantial upside to getting in the flow now (no pun intended) with PSXP, EPD, and especially ET. In sum, for the value-inclined, their dividends are second-to-none. For the growth minded, I expect these pipeline operators to benefit significantly from increased energy demand and the continued need to move clean fuels throughout the country in the safest way possible. As such, an ESG investing strategy, or any portfolio allocation within the energy sector, that shuns pipelines will be met with disappointment in the long-term.
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