A Closer Look at Investing in Pipelines

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The normally quiet world of moving oil and natural gas around the country as hit the front page in recent weeks and months as investors, environmentalists, and politicians weigh in on the industry.

Some of the news has made me bullish on pipeline owners, some has me worried about their risks, and another piece is full of complicated opinions. Here's a look at what these three moves mean for shareholders and how to invest in pipelines now.

Pipelines and protests
On the surface, the Keystone XL pipeline proposed by TransCanada (NYSE: TRP  ) looks like a no-brainer. Bring more oil in from Canada, reduce our reliance on other foreign oil, and create (by Fox News' wild statements) up to a million new jobs in the process. But there's much more to the story than that.

On the jobs front, unless the oil is going to be passed hand-to-hand from Alberta to Texas, I can't imagine how in the 1 million jobs would be created. In fact, TransCanada estimated only a few hundred long-term jobs would be created, and the short-term ones would only amount to a few thousand. The only independent study said that the net effect would be a grand total of zero jobs created.

After all, isn't that the point of a pipeline? To create infrastructure where a minimal number of people can move a massive amount of oil.

One of the major reasons people are up in arms about Keystone XL is that the tar sands oil is much less efficient and more environmentally harmful than conventional oil. It uses three barrels of water per barrel of oil, creates giant sludge pools of wastewater, and uses more energy to be refined than conventional oil. But beyond the environmental reasons, there are practical reasons that tar sands aren't a "must have" right now for the U.S.

What we seem to be overlooking in our outrage about Keystone XL is that the U.S. has done a very good job of creating jobs and drilling for oil here at home. Projects by Kodiak Oil & Gas (NYSE: KOG  ) , Continental Resources (NYSE: CLR  ) , and Brigham Exploration (Nasdaq: BEXP  ) have helped reduce our dependence on foreign oil from 60.3% of consumption to 44% of consumption since 2005.

That rapid drop in dependence on foreign oil means we don't need to overlook problems with tar sands oil before approving a pipeline like Keystone XL. The project is on the shelf for now, and although it will be a political talking point, I don't think it's a place I would invest money right now.

Pipeline reversal
This week, oil refiners were put through the wringer when Enbridge and ConocoPhillips announced they were reversing the direction of the Seaway pipeline.

Refiners have been able to buy cheaper West Texas Intermediate, or WTI, oil versus the cost of Brent crude, and the move will likely put pressure on margins. This is just another byproduct of increased shale or tight oil drilling and expanded U.S. production. What's good for most of us isn't necessarily great for everyone.

It isn't like refiners are going to go belly-up because of this pipeline reversal, but I wouldn't be buying them now, and this shows the power that pipelines have over other parts of the oil industry.

El Paso acquisitions
What really put the stamp on the value of pipelines this month was Kinder Morgan's $38 billion buyout of El Paso, driven by the company's natural gas assets. The increased production of natural gas in the U.S. has changed the whole energy dynamic, and pipelines will play a major role in getting fuel where it needs to go.

We have so much natural gas that Cheniere Energy's (AMEX: LNG  ) original import facility at Sabine Pass has now become a potentially huge export facility.

The best way to get natural gas to facilities like this -- and a growing network of liquefied natural gas stations from Clean Energy Fuels (Nasdaq: CLNE  ) -- is, of course, by pipeline.

Considering the growth of natural gas production and the likely expansion of consumption by utilities and the transportation industry, I think this is the best way to play the industry. My top pick is Kinder Morgan's new subsidiary, El Paso Pipeline Partners (NYSE: EPB  ) , an MLP that pays a 6% dividend and has great exposure to the natural gas market.

I'll back up this pick by giving El Paso Pipeline Partners a green thumb in My CAPS page, which you can follow here.

Foolish bottom line
Pipelines are very important to our national energy infrastructure, and with a changing supply base, they will play a growing and dynamic role in our future. But as we've seen with Keystone XL, there are advantages and disadvantages to pipelines. They run through people's backyards, farmland, and affect the environment around us. They're not guaranteed to make a buck -- but when played right, they can pay off in spades over the long term.

Interested in reading more about pipeline companies? Add your favorites to My Watchlist, which will find all of our Foolish analysis on each stock.

Fool contributor Travis Hoium does not have a position in any company mentioned. You can follow Travis on Twitter at @FlushDrawFool, check out his personal stock holdings or follow his CAPS picks at TMFFlushDraw.

Motley Fool newsletter services have recommended buying shares of El Paso Pipeline Partners and TransCanada. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

Read/Post Comments (11) | Recommend This Article (11)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On November 18, 2011, at 2:17 PM, NKDISPR wrote:

    Gee Travis sounds like you are a tree hugger and don't care if we continue to give Chavez and Muslin countries our business instead of a friend and neighbor Canada. Given a chose I would prefer Canadian Oil sand oil to Sharia law and dictatorships.

  • Report this Comment On November 18, 2011, at 3:06 PM, ludwigbodmer wrote:

    And how many Alaskan pipeline leaks have there been? Remember how all of the Caribou herds were going to be wiped out? Time to understand that America is about risk assumption and problem solving. Your interventionist mentality is misplaced and costing every American more money for fuel. The Ogallala aquifer sitting under Nebraska is so massive that any number of leaks would be hard pressed to pollute it. It is more likely depletion of the aquifer will occur from crop farming that relies on it as an irrigation source. However, the issue at hand is NOT petroleum exploration but rather development of hydrogen fuel cell technology to replace the hydrocarbon burning combustion engine. The ability to focus on problem solving is not practiced by political committees, appointees, or info-entertainment journalists. So why not refocus your effort on haranguing the big "village" politicos worried about the WRONG problem, and get them to refocus on hydrogen fuel cell technology. Start with that non apologist at the DOE, Chu. If fuel cell development was handled like the Manhattan project, I bet we could all be driving hydrogen powered vehicles within 5 years. And the oil, well we can reserve its use for essential purposes but in significantly less quantity. And the Ogallala can remain pure to irrigate the crops.

  • Report this Comment On November 18, 2011, at 5:36 PM, oxboro wrote:

    Sounds like Travis should walk to the woods, dig a hole for a tree. In forty years, he could walk back to the tree cut it for firewood and have heat for the month.Please repeat every 40 years.

  • Report this Comment On November 18, 2011, at 10:56 PM, oilforever wrote:


    You can always tell a tree hugger by how little they know about the oil sands.

    3-1 water to il. Are you sure some of this water is not re-captured.

    No mention of the nat gas that is used hmmm thought you would sink yuor teeth on that one.

    calling it tar sands .. come on.. even the tree huggers must realize the inaccuracy of that

    And of course these generalities

    "much less efficient and more environmentally harmful than conventional oil". and

    "creates giant sludge pools of wastewater"

    How big is giant? Apparently not very big as the total pools account for less than 20 sq miles and even these are eventually reclaimed. A lot of work is being done to speed this process up.

    Ever here of Mountaintop removal mining (MTR), ?This is what surface coal mining does It is gross waht it does to the landscape. The USA has many thousands of sq mile of surface mines and, as well, we all know how clean burning coal is.

    How much more environmentally unfriendly? From source to the exhaust of cars it is aronud 5% more. How about shale oil/gas it is about 2-3 %. Ever hear of shale. Of course you have . It's US production will far exceed the oil sands and yet it's carbon foot print is only slightly better. How about it's potetential of poluting the ground water (not that I believe it) all over the USA. I guess you think everyone shoiuld quit burning fuel oil and nat gas for heat and give up their cars.

    Do you have a car?

    Actually losing some sales to the USA won't matter for if you follow the Candaian news you will see all of the retoric regarding shipping our oil to Asia. By the way the Asians are heavily investing in the oilsands and our pipeline to the Pacific so it will happen.

    Finally the jobs. mmm Ablerta has created more jobs in the past qtr than the entire USA has this year. By the way where do you think the 7 billion fore keystone would have gone? Those few hundred people must be pretty well paid.

    THe next time you write a boarring inaccurate article try researching.

    Try any of these websites.


    Cdn NAt Resources


    Transcanada Piplines





    Athabasca Oil Sands

    You may want to invest in them

  • Report this Comment On November 19, 2011, at 7:07 AM, skypilot2005 wrote:

    NKDISPR, ludwigbodmer , oxboro & oilforever

    Travis a “Tree Hugger”? Yup. Starting off a “financial” piece with an attack on Fox News is a dead giveaway.

    Travis said:

    “by Fox News' wild statements”

    “One of the major reasons people are up in arms about Keystone XL is that the tar sands oil is much less efficient and more environmentally harmful than conventional oil. It uses three barrels of water per barrel of oil, creates giant sludge pools of wastewater, and uses more energy to be refined than conventional oil”

    “But as we've seen with Keystone XL, there are advantages and disadvantages to pipelines. They run through people's backyards, farmland, and affect the environment around us.”

    Travis just blew his financial analysis credibility / objectivity with thousands of Fools.

    The adults at The Fool need to put these types of articles where they belong; in the Political Commentary “Section”.

  • Report this Comment On November 19, 2011, at 2:34 PM, StratagemCA wrote:

    Uh, "tar" sands? Thanks for the heads up - I don't like taking advice from a vested interest.

  • Report this Comment On November 19, 2011, at 4:06 PM, johnhenr wrote:

    I thought we weren't supposed to be discussing politics on these comments? The writer is an obvious tree hugging, environmental whacko, leftists. Please send the tree huggers to the commentary section and leave the rest of of us who want to live in the real world, not some utopia la la land, alone.

  • Report this Comment On November 20, 2011, at 1:09 AM, tamr666 wrote:

    Travis should freeze in the dark.

  • Report this Comment On November 20, 2011, at 2:26 AM, oilforever wrote:


    If you want to appear a little smarter about the oil sands check out page 34 and 35 of this presentation

  • Report this Comment On November 20, 2011, at 9:34 PM, MrChapel wrote:

    Gentlemen & Ladies,

    Please forgive Travis. His usual mainstay, the green industry, is being tainted more and more each day, from the hits the 'green scientists' have taken with their own hockey stick, to the crony loans DOE has given to Solyndra, Fisker and many other green ventures, who coincidentally are run by or have big interests from DNC donors/bundlers.

    How about his many, many articles expounding the virtues of investing in solar companies over the last two years? Have you noticed how suddenly, the moment all the solar companies began losing income due to the cutting of subsidies, the amount of solar articles by Travis' hand have practically been cut by 90 percent? Suddenly, he's writing more and more articles with regards to oil and gas.

    How about the fact that Travis rather not reply to challenges to his assertions when these are backed up by proof? I do remember an article he wrote about the coal industry, in which he stated that a group of energy companies, including the UK's NRG (National Grid) was backing the new orders from I believe, the DOE regarding particles in the air. A directive that would cause massive brownouts and blackouts, massive costs for upgrading/new-build energy plants and shutting down plants by 2014, I believe. In that particular article, he alluded that this group (NRG, Exelon and others) were major coal users BUT were completely behind the directive.

    Since I was personally following this issue (due diligence since I was interested in coal companies), I was skeptical, as I knew that the two utilities he mentioned (NRG/Exelon) do not use coal, so I did a little digging to be certain. NRG's US subsidiary uses mostly gas. Exelon nuclear. I pointed this out in a number of comments on that article, complete with links to the site of the consortium, where the names of all the energy companies were displayed and links to the actual websites of the companies, wherever possible to the pages showing what percentage of their total output came from what fuel type.

    Surprise, surprise (not really) but dear Travis NEVER replied back. He NEVER came forward with a rebuttal. Then again, it is very hard to refute facts from the utilities themselves. I mean, of course NRG and Exelon will be glad to see coal fired plants go. It means that their competition in other states get shut down wholly or partly, since prices are pretty fixed by the state governments, right? And NRG/Exelon/et al just so happen to generate almost all of their power by other means. It would be much easier for them to step into those markets that had to close older plants.

    As for the Keystone XL project, from what I've read, the number of jobs that ultimately would be generated was around 20.000. But hey, it's not like the US has high unemployment right? We have all those hundreds of thousands of 'green jobs', right? You know, the ones that cost the taxpayer up to a few millions PER JOB in many cases? Maybe the pipeline itself would not bring in many jobs but it would bring jobs to the areas in runs through in secondary and tertiary positions. Pipeline workers need to be supplied with everything, from food to equipment. Housing. Entertainment. Repairs. They need contractors, sub-contractors etc.

    Travis, while this article has many good points, your blatant sneer towards an independent news organization, your habit of not answering comments critical of your findings, your often sloppy, even downright incorrect factual information and more importantly, your blatant un-objectivity are the reasons why many MF readers seem to have lost faith in you, to put it mildly. You might want to work on that, jus' sayin'.

  • Report this Comment On November 23, 2011, at 1:15 PM, surfgeezer wrote:

    Man the people slamming Travis for being political or "to" green, need to look in the mirror.

    Full disclosure I own shares in many pipeline companies- THAT does not mean I don't see a reason to regulate how well they are built or where-it is INFRASTRUCTUR and is supposed to stay in place a long time. Nebraska has lot's of pipelines now-just not thru the aquifer-asking to re route around IS NOT horrible, the company had alternate plans and can do it quickly, begs the question why didn't they-oh yeah it would cost slightly more and they started planning when Cheney was in power-2005, political enough? LOL.

    I am long EEP, so in fact I benefit as Enbridge, already the largest US/Canada pipeline and can just increase capacity on existing routes. I am also long EPD, so let me add I sold KMP to buy EEP and for THAT exposure. KMR will be taking half their future dropdowns from EP, that were slated for EPD. This half growth will still mean earnings should grow at about 9%, so still long.

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