A flood of investor money set to come down the pipeline
CALGARY -- This is shaping up to be the year of the pipeline. There was a hint things were heating up a couple of years back when TransCanada PipeLines announced it was getting back into shipping oil down to the United States. Now it appears things are really going to start moving.
One of the big reasons for this has to do with renewed access to capital for pipeline companies. Until the income trusts came on the scene in the late 1990s, pipeline stocks were the classic "widows and orphans" investment choice. They offered stable rates of return and minimal share price volatility. The handsome cash distributions by income trusts trumped the attraction of these utility stocks and compromised their ability to tap the public markets in the traditional sense.
That was the case until Finance Minister Jim Flaherty effectively tossed the trust model out the window last fall. In his testimony this week before the parliamentary finance committee, he showed he obviously has no intention of changing his mind.
What's bad news for one sector, however, is good news for another. Yield-hungry investors are once again interested in the pipeline stocks -- and the pipeline companies need the money.
For public entities like Enbridge and TransCanada, the timing couldn't be better. There are also the private concerns, such as Altex Energy and Kinder Morgan, looking for cash to fund their projects, which will undoubtedly find renewed interest from investors.
No wonder Enbridge has already raised $523-million and TransCanada is getting ready to tap the equity and debt markets for as much as $3-billion.
It's a safe bet the list won't end there.
They all need money, and lots of it, to complete their planned expansions, or new projects, primarily aimed at taking advantage of the burgeoning growth in oil sands production.
So what's on the agenda?
TransCanada needs to finance its mammoth $3.4-billion (U.S.) purchase of natural gas pipelines and storage facilities from El Paso without compromising its credit rating. It also requires the dough to finance its Keystone project, whose price tag was raised by $700-million this week to $2.8-billion.
The question is whether the entire Keystone will be approved by the National Energy Board some time in the first quarter of this year and, if so, will the NEB give the nod to the plan that would see 590,000 barrels shipped to Oklahoma or just the original 435,000-barrel-a-day plan. There's also some suggestion it will expand the power generation side of its business. Either way, it all requires money to get done.
Enbridge said it is ready to spend $2-billion to ship more heavy oil from the oil sands into U.S. markets and is still waiting to land a commitment with Canadian shippers or refiners in China in order to get its Gateway pipeline from the oil sands to the West Coast under way. If Gateway goes ahead, its price tag is $4-billion.
Also on the books is a plan to build a link from Chicago -- the main point of delivery for Canadian crude -- into Philadelphia. All this is on top of the $1.8-billion (U.S.) Alberta Clipper line from Alberta into Wisconsin as well as the $1.3-billion Southern Lights pipe, which will carry a solution called diluent (used in the oil sands) from Chicago to Alberta.
But that's not all for the pipeline world.
The schedule and updated costs for the Mackenzie Valley pipeline are expected some time in the first quarter and Alaska's new Governor is restarting the process on the Alaska pipeline with a call for proposals. TransCanada figures into both these projects as well.
There are five members in the consortium and it's not out of the question that one or more could sell their stake in the project at a point in time.
TransCanada, because it has an interest in the Aboriginal Pipeline Group, is well poised to take advantage of this scenario, should it arise. When it comes to Alaska, TransCanada still has the rights to build the Canadian portion of the pipeline, thanks to the Northern Pipeline Act that was passed in the late 1970s.
But there is some suggestion that Enbridge, through its Alliance stake, could also be part of the Alaska infrastructure. As analyst Steven Paget of FirstEnergy Capital points out, Alliance moves natural gas to Chicago and could tie into the Alaska pipe.
No matter how one looks at it, this usually sleepy world of pipelines, shipping costs and regulated rates of return is about to get quite interesting now that decisions will be made both on projects and the amount of money required to be raised in order to carry out all the plans.
What's clear is that the need for infrastructure in order to get natural gas and oil to new and existing markets is only going to increase in the years to come, and 2007 could very well prove to be the inflection point in a growth curve that has remained relatively steady in the past few years.
