• Three Factors Broadening the MLP Moat

    10/26/16 | Maria Halmo

    Everyone loves Buffett and his advice to look for stocks with a large moat. A moat is really just another word for one or many competitive advantages. For MLPs, their moat has traditionally been their monopolistic footprints, as it’s quite difficult to build a new pipeline to compete with an existing one. However, the environment has been changing, and the MLP moat has been widening in three important ways:

    (1) Regulatory Difficulties and Governmental Red Tape

    This has been the most popular talking point with MLPs for a while, but the discussion is not as nuanced as it should be. Yes, it’s true; the regulatory environment is more challenging making “steel in the ground” more valuable. However, it’s not as simple as Keystone XL not being given regulatory approval so construction never begins.

    The Access Northeast pipeline, being built by Spectra Energy (SE) and Spectra Energy Partners (SEP), has regulatory approval to be built, but has stumbled due to different concerns. Once anchored by commitments from two public utilities, this natural gas pipeline would serve power plants in the region enabling greater electricity reliability. However, the Massachusetts court has now prohibited utilities (the owners of the power plant and the customers of the pipeline) from raising rates in order to help support the pipeline. Due to this ruling, several companies have been forced to abandon their commitments. Piling on, the New Hampshire courts also joined Massachusetts in a similar ruling. Although the pipeline does not run through the state, it will affect its electricity customers.

    Earlier this year, Kinder Morgan (KMI)’s Northeast Energy Direct pipeline was canceled, citing not only business and environmental difficulties, but also concern that New England’s other courts would rule as Massachusetts’ and New Hampshire’s did and prevent electricity customers from being charged for pipeline costs. Additionally, KMI had to cancel their Palmetto Pipeline project, this time citing difficulty achieving traditional regulatory eminent domain approvals in Georgia.

    (2) Canada to Approve Only One Project

    Under Prime Minister Justin Trudeau, Canada is likely to approve one major pipeline project this year. No one knows which pipeline this will be; however, the company most likely to get that approval will likely be a familiar name to those of us who follow the energy infrastructure space. Established companies have experience building and maintaining assets and have (generally) won the trust of governments and the public. The media is currently citing KMI’s Trans Mountain Pipeline Expansion as the first to be approved, given that it already has (conditional) approval from the Canadian EIA counterpart, the National Energy Board.

    Other projects waiting for approval include: Northern Gateway (owned by Enbridge Inc (ENB)) and Energy East (owned by TransCanada (TRP)). Of course, all the projects could be approved, but saliently, each will be considered under its own merits.

    (3) Environmental Protests

    Given the Dakota Access Pipeline and other environmental protests, projects can be delayed and become more expensive. For large projects, it takes a large company, like Energy Transfer Partners (ETP) to weather the storm. A small, new business may see those challenges and decide to move in a different direction.

    What it Means

    Steel in the ground has now been afforded premium valuations which benefits the existing MLPs. Since the approval and building of new assets is more challenging, the existing assets have naturally seen their value (and valuations) rise. This is commonly referred to as the benefit of steel in the ground; however, not only are existing assets now more valuable, the rights of way that come alongside pipelines also have value. To lay a new pipeline alongside an existing pipeline can be regulatorily easier than building an entirely new route.

    Bringing it back to Buffett, and more specifically, to Charlie, no matter how large your moat, it’s hard to fight a fanatic. They cite Rose Blumkin, Les Schwab, and Sam Walton as great examples of this. The regulatory environment has widened the moat, but there are passionate and dedicated renewable energy inventors building flying ships every day.