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This Pipeline Company Is Counting Down Until Inauguration Day

By Matthew DiLallo - Nov 21, 2016 at 12:01PM

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Energy Transfer Partners will likely be able to finish its key Dakota Access Pipeline shortly after Donald Trump takes office.

Image source: Getty Images.

Despite following every letter of the law along the way, Energy Transfer Partners (NYSE: ETP) has encountered an unexpected obstacle in the quest to build the Dakota Access Pipeline: a reluctant federal government. That is after the U.S. Army Corp of Engineers decided to re-review an essential permit the company needed to construct the pipeline on federal land amid growing protests surrounding the critical infrastructure project. However, despite the mounting delays, escalating protests, and ensuing legal battles, the company will likely get its permit come Jan. 20 when Donald Trump takes office.

Drilling down into the issues

The troubles for Energy Transfer Partners, and its joint venture partners Sunoco Logistics Partners (NYSE: SXL) and Phillips 66 (PSX 3.74%), started this past summer when the Army granted them the permits needed to cross underneath Lake Oahe in North Dakota. That crossing would enable the partners to finish the roughly 1,200-mile pipeline that will take oil from the Bakken shale to Illinois, where it can then access other pipelines to the country's Gulf Coast refining hub. However, that decision to allow drilling under the key Missouri River reservoir did not sit well with the Standing Rock Sioux Tribe, which relies on Lake Oahe for fresh water and is worried that a pipeline rupture could contaminate the lake and its sacred sites in the region.

Those concerns led to growing protests from both the tribe and environmental groups, which ultimately led the Army to decide in September that it needed more analysis on the route. It recently delayed the final decision even further saying it still needed more time for analysis and tribal input. That forced Energy Transfer Partners to take legal action, with a decision expected in January.

Image source: Getty Images.

Trump to the rescue?

That legal action might be a moot point given the outcome of the recent election. That is because Donald Trump's vision for America is that we would become energy independent. That means unleashing the vast torrent of energy currently trapped in shale formations throughout the country, including North Dakota. However, one of the hindrances of shale development is the lack of pipeline capacity, which had forced Bakken producers to ship oil on railroads. That option is not only more expensive but also much more dangerous, with one study showing that moving oil by pipeline is 4.5 times safer than moving it by rail.

That said, the expense alone is one reason why producers have significantly reduced drilling activities in North Dakota. However, according to James Volker, CEO of leading Bakken producer Whiting Petroleum (WLL), this pipeline would cut regional transportation costs by about $3 per barrel. Because of that, Whiting Petroleum's break-even point in the Bakken would drop down to $47 per barrel. That would boost not only its profitability but also increase Whiting's capacity to grow production, which when multiplied across the region, puts the country a little closer to energy independence.

Because of those factors, Energy Transfer's CEO Kelcy Warren told the AP in a recent interview that he is "pretty confident that worst case, Jan. 20, we get our easement and proceed." That said, his company is not placing undue reliance on the new president stepping in to help it out. It is working to get a court date set for early next year, which, if everything goes according to schedule, could see the company get its permit on Jan. 19 given the time frame this particular judge has operated under in the past. Either way, the company would then need about 100 days to finish this particular segment of the $3.8 billion project, which suggests it could go into service in the spring. While that is a few months past the partners' initial plan to start collecting cash flow from the pipeline in late 2016, it is far better than to have spent $3.8 billion on a nearly complete pipeline only to see it remain unfinished.

Investor takeaway

It seems like a foregone conclusion that the Energy Transfer-led partnership will be allowed to finish the crucial Bakken pipeline early next year. Doing so will not only enable the partners to collect the pipeline's contracted cash flows for the benefit of their investors, but it will save oil companies money. That will give them more capital to reinvest in new wells, which will push the country closer to the incoming president's vision of becoming energy independent.

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