Hedge funds are making big bets on the pipeline industry. During the first half of 2012, institutional investors significantly increased positions in four stocks: TransCanada Corp. (TRP), Enbridge Inc. (ENB), The Williams Cos. (WMP) and Kinder Morgan Energy Partners (KMP).
Over the past three years, energy pipelines have posted strong results with share prices advancing 150%. The industry has been driven by robust energy production growth and income hungry investors chasing higher yields. Pipelines have become the play on North American energy development with minimal exposure to swings in commodity prices.
Hedge funds are investing heavily in the following pipeline stocks:
TransCanada (TRP): TransCanada is one of the largest midstream oil & gas company in North America. With a market capitalization of $29 billion, the company owns and operates more than 37,000 miles of natural gas pipelines. Several hedge funds initiated positions in TransCanada during the 1st quarter of 2012 including trend following David Harding at Winton Capital Management and Israel Englander at the Millennium Management. TransCanada investors are attracted to the company’s highly visible 6-8% EPS growth rate and juicy 4% dividend yield.
In January, the Obama administration shelved plans to build an extension to the existing Keystone pipeline (Keystone XL). This project would connect Canadian and North Dakota oil production to refineries in the Gulf Coast. Analysts are optimistic that the Keystone pipeline will be approved after the U.S. presidential election in November and will be completed within a few years. This should provide a catalyst for higher share prices.
Enbridge (ENB): Enbridge, with a market capitalization of $30 billion, owns one of North America’s largest crude-oil pipeline networks. Their system connects the Alberta oil sands with refineries in the Midwest. Several hedge funds initiated positions in the 1st quarter of 2012 including Christopher Grisanti at Grisanti Brown & Partners and Andy Redleaf at Whitebox Advisors. Ray Dalio at Bridgewater Associates also increased his position size by 86%.
Enbridge is an industry favorite amongst analysts. The company is projected to grow earnings by 10% annually over the next decade due to rapid production growth from the Canadian oil sands.
Some analysts caution that investor growth projections are too optimistic, citing regulatory hurdles for the company’s proposed Northern Gateway pipeline. The project plans to ship crude oil from Alberta to shipping terminals on the west coast. However, the business friendly climate in Canada, a result of the national conservative government, will likely result in the swift approval of the pipeline.
Williams Companies (WMB): Williams Companies (WMB) is involved in the processing and transportation of natural gas with operations concentrated in the Rocky Mountains, the Gulf Coast, and the Eastern Seaboard.
S&P analyst Tanjila Shafa recently upgraded Williams Companies to buy from hold based on the stock’s revenue and dividend growth potential. Tanjila provided a $37.00 price target based on a 7.7x EV/EBITDA multiple, in line with the company’s five year average.
Kinder Morgan Energy Partners (KMP): Kinder Morgan is the largest publicly-traded master limited partnership (MLP). The company owns and operates the largest independent petroleum pipeline system in the United States. The stock has been on a tear in recent months, advancing 12% over the past year. Several hedge funds added to their position in the 1st quarter of 2012, including D.E. Shaw and Israel Englander at Millennium Management.
Analysts are bullish on the stock citing a visible 6.8% EPS growth rate, attractive 5% dividend yield and inexpensive valuation. The stock is trading at 13.3x EV/EBITDA, slightly below the average for comparable U.S. MLPs including Boardwalk Pipeline Partners (BWP) and Plains All American Pipeline (PAA).