Get on Board With Commodity Transports

 | May 18, 2012 | 6:00 PM EDT
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It is difficult to make money in natural gas and electric power. Both have a tendency to surprise traders -- just look at the recent price histories. A year ago, nobody would have predicted natural gas would trade so low.

To avoid commodity risk, one strategy is to own assets that transport commodities. Pipelines and transmission lines move massive amounts of other people's natural gas and bulk power across state lines and deliver them to local distribution systems.

In the U.S., most pipelines and all transmission lines are considered interstate commerce and they are regulated by the Federal Energy Regulatory Commission (FERC) on a cost-plus basis. Unlike commodity production, it is difficult for a pipeline or a transmission line operator to lose money.

There are far more opportunities to own pure natural gas transportation assets than power line assets. According to the Energy Information Administration (EIA), the U.S. has approximately 220,000 miles of pipelines with a system capacity of 183 billion cubic feet per day. They are owned by 30 companies.

The nation's largest pipeline is the Northern Natural Gas Company. It has 15,874 miles of pipe with a 5.5 billion cubic-feet-per-day design capacity. It is owned by Berkshire Hathaway (BRK.A).

El Paso Pipeline Partners (EPB) is a focused opportunity for investors. Its system includes 12,900 miles of pipeline and associated storage facilities with aggregate storage capacity of approximately 97 billion cubic feet. The company has a market capitalization of approximately $7.6 billion, a price-to-earnings ratio (P/E) of 16.2, a dividend yield of approximately 6.28% and strong financials. Its general partner, El Paso (EP), has a definitive agreement to be acquired by Kinder Morgan (KMI) on May 24. Kinder Morgan will have a 42% limited partner interest and a 2% general partner interest.

The Transcontinental Gas Pipeline (Transco) operates 9,800 miles of natural gas pipeline extending from the Gulf of Mexico to New York. It controls 45 gas compressor stations, four underground storage fields, and a liquefied natural gas storage facility. Transco is a subsidiary of Williams Partners (WPZ).

Williams Partners' assets are substantial. In addition to Transco, Williams Partners owns three other gas pipelines and considerable midstream assets. It has a market capitalization of $17 billion, a P/E of 14.1, a 5.79% dividend and strong financials. The Williams Companies (WMB) owns 70% limited partnership interest in Williams Partners and all of its 2% general partner interest.

A smaller alternative is Spectra Energy Partners (SEP). Its pipeline system covers more than 3,200 miles and has an aggregate working gas storage capacity of approximately 57 billion cubic feet. Spectra Energy Partners has a market capitalization of only $3 billion, a P/E of 18.6, dividends of 6.4% and strong financials. Spectra Energy (SE) and its subsidiaries collectively owned 64% of the company.

Those seeking an international opportunity might consider Golar LNG's (GLNG). Golar is one of the world's largest independent owners and operators of liquefied natural gas (LNG) vessels. The company developed the world's first Floating Storage and Regasification Unit  and it is growing its business further upstream via floating liquefaction  with the strategic objective to become an integrated midstream player in the LNG industry.

Golar is not regulated by FERC and can lose money. The company hedges its positions with long-term charters against bankable counterparties. It takes no commodity risk. As countries like the U.S., Canada and Australia enter into the LNG markets, they will need more ships to transport their product to consuming markets. The demand for LNG shippers will grow.

The investment opportunity is with Golar's subsidiary, Golar LNG Partners (GMLP). Golar LNG owns a 2% general partner interest, all of its incentive distribution rights and a 63.4% limited partner interest. Golar LNG Partners has a market capitalization of approximately $1.2 billion, a P/E 16.3, a dividend of 5.53% and strong financials.

Last Tuesday, Reuters reported that BP Capital, the investment management firm led by billionaire energy investor T. Boone Pickens, added 49,000 shares of Golar to its holdings in the quarter ending Dec. 31. The most recent report on the fund's holdings indicates the firm bought some 92,000 more shares to 141,000 during the quarter ended March 31.

Receiving dividends with P/E ratios in the teens is a lot less stressful than tracking commodity-based companies like Chesapeake Energy (CHK). Most integrated electric and gas utilities cannot pay dividends at these levels. Yet, most of these companies are regulated just like some electric utilities.

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