This Pipeline Has Premier Assets and Solid Growth

Pipeline investors have several great options to choose from. However, this pipeline provides it all: high single-digit cash flow growth, a rock-solid coverage ratio, and world-class "backbone" assets.

May 27, 2014 at 3:39PM

Back in 2012, Kinder Morgan Energy Partners (NYSE:KMP) sold its stake in the backbone of Canada-U.S. crude oil transport: the Express-Platte Pipeline. The Express-Platte system runs from Hardisty, Alberta, the heart of the oil sands, to the Wood River Illinois refinery complex. Kinder Morgan had only a partial interest in the pipeline and wanted to reallocate assets into something over which it would have more control.

The buyer of Kinder Morgan's interest was a smaller pipeline partnership which had interests in Western Canada and a pipeline network from the traditional supply area of natural gas, the Gulf Coast, to the traditional demand area, New England. That partnership was Spectra Energy Partners (NYSE:SEP), and its acquisition in the Express-Platte interest was transforming.

Spectra now has multiple growth assets and two strategically important 'backbone' pipelines in its portfolio, making it one of the premium asset holders among pipeline partnerships. This article will look at Spectra's growth prospects and its valuation. 

G

The Trans Alaska Pipeline. Source: Wikipedia

Dry gas shakeup
Spectra's single biggest natural gas transport asset is its pipeline from the Gulf Coast into New England. Traditionally New England has been the biggest consumer of natural gas in the country, and the Gulf Coast has been the biggest supplier. However, with the discovery and development of the Marcellus shale, a 'mega-shale' in Pennsylvania with perhaps a century's supply of natural gas, that supply dynamic is changing rapidly.

In the future, New England, and ultimately even the Gulf Coast region, will get much of its gas from the Marcellus shale. The demand dynamic is changing as well. With natural gas so inexpensive, many homes in the Northeast are switching from oil heating to gas heating, which is further increasing demand for natural gas. On the Gulf Coast, more natural gas is also needed thanks to a build-out of industrial capacity.

Spectra is well out ahead of both trends, with more than $4 billion in plans for bi-directional pipelines from the Marcellus to New England, the Gulf Coast, and even the Midwest. The last of these projects will come online in 2017.

Liquids pipelines
Overall, the market for oil and natural gas liquids in North America is very dislocated. Due to inadequate infrastructure, going oil prices in Canada and the Bakken are significantly lower than those of the rest of the country. West Texas Intermediate is also at a significant discount to Brent Crude. This all works in the favor of pipelines, which serve to transport liquids from one place to another.

To the surprise of few, capacity in the Express-Platte pipeline system is completely sold out for 2014. This Hardesty-Wood River pipeline carries crude oil from the oil sands and Bakken, both of which trade at a significant discount. In addition to Express-Platte, Spectra has capital spending plans of $10 billion in liquids transportation projects in North America. 

This is a big game-changer and will provide steady growth for years to come. For example, earnings before interest, taxes, depreciation, and amortization from all liquids transportation is expected to grow by 32%, compounded until 2016 at the earliest. Of that 32%, 19% will come from Express-Platte alone. 

Bottom line
Spectra Energy Partners plans to grow EBITDA earnings by 11% this year and an 8%-9% compounded growth rate after that until 2016 at the earliest. The partnership's distributable cash flow sits at a fantastic 1.4 times distributions, making Spectra one of the most well-covered partnerships there is. With 'backbone' assets, solid growth, and a very well covered dividend, Spectra is one of the top-tier partnerships right now. 

3 income plays to ride America's energy bonanza
Record oil and natural gas production is revolutionizing the United States' energy position. Finding the right plays while historic amounts of capital expenditures are flooding the industry will pad your investment nest egg. For this reason, the Motley Fool is offering a look at three energy companies using a small IRS "loophole" to help line investor pockets. Learn this strategy, and the energy companies taking advantage, in our special report "The IRS Is Daring You To Make This Energy Investment." Don't miss out on this timely opportunity; click here to access your report -- it's absolutely free. 

 

Casey Hoerth owns shares of Kinder Morgan Energy Partners LP. The Motley Fool has no position in any of the stocks mentioned. 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.

Money to your ears - A great FREE investing resource for you

The best way to get your regular dose of market and money insights is our suite of free podcasts ... what we like to think of as “binge-worthy finance.”

Feb 1, 2016 at 5:03PM

Whether we're in the midst of earnings season or riding out the market's lulls, you want to know the best strategies for your money.

And you'll want to go beyond the hype of screaming TV personalities, fear-mongering ads, and "analysis" from people who might have your email address ... but no track record of success.

In short, you want a voice of reason you can count on.

A 2015 Business Insider article titled, "11 websites to bookmark if you want to get rich," rated The Motley Fool as the #1 place online to get smarter about investing.

And one of the easiest, most enjoyable, most valuable ways to get your regular dose of market and money insights is our suite of free podcasts ... what we like to think of as "binge-worthy finance."

Whether you make it part of your daily commute or you save up and listen to a handful of episodes for your 50-mile bike rides or long soaks in a bubble bath (or both!), the podcasts make sense of your money.

And unlike so many who want to make the subjects of personal finance and investing complicated and scary, our podcasts are clear, insightful, and (yes, it's true) fun.

Our free suite of podcasts

Motley Fool Money features a team of our analysts discussing the week's top business and investing stories, interviews, and an inside look at the stocks on our radar. The show is also heard weekly on dozens of radio stations across the country.

The hosts of Motley Fool Answers challenge the conventional wisdom on life's biggest financial issues to reveal what you really need to know to make smart money moves.

David Gardner, co-founder of The Motley Fool, is among the most respected and trusted sources on investing. And he's the host of Rule Breaker Investing, in which he shares his insights into today's most innovative and disruptive companies ... and how to profit from them.

Market Foolery is our daily look at stocks in the news, as well as the top business and investing stories.

And Industry Focus offers a deeper dive into a specific industry and the stories making headlines. Healthcare, technology, energy, consumer goods, and other industries take turns in the spotlight.

They're all informative, entertaining, and eminently listenable. Rule Breaker Investing and Answers are timeless, so it's worth going back to and listening from the very start; the other three are focused more on today's events, so listen to the most recent first.

All are available for free at www.fool.com/podcasts.

If you're looking for a friendly voice ... with great advice on how to make the most of your money ... from a business with a lengthy track record of success ... in clear, compelling language ... I encourage you to give a listen to our free podcasts.

Head to www.fool.com/podcasts, give them a spin, and you can subscribe there (at iTunes, Stitcher, or our other partners) if you want to receive them regularly.

It's money to your ears.

 


Compare Brokers