Oil giant Exxon Mobil Corporation (NYSE:XOM) is being sued for $5 million after one of its pipelines burst which led to a small oil spill in an Arkansas town. The Exxon Mobil Corporation (NYSE:XOM) pipeline, Pegasus, was carrying Canadian crude oil from Illinois to the refinery hub of the Gulf of Mexico. While the cause of the spill is still under investigation, it’s not believed to have had any major impact on the drinking water supply, though it still caused damage to a handful of houses. Two of those homeowners are now filing suit saying that the rupture has caused permanent damage to area property values.
While the lawsuit represents just pocket change for Exxon Mobil Corporation (NYSE:XOM), the incident is a reminder of the risks faced by pipeline operators. An incident like this can come with a high price tag. Whether its cleanup, lawsuits, or lost revenue, these costs have the potential to have a negative effect on the operator’s bottom line. Investors in major pipeline operators like Kinder Morgan Energy Partners LP (NYSE:KMP) and Enterprise Products Partners L.P. (NYSE:EPD) are much better insulated against these risks because of the diversity of their operations as well as their balance sheet strength. However, if you’re considering swapping out for a smaller operator with a higher yield, you might want to think twice before you make that move.
Given that one invests in a pipeline company with one goal in mind – income – you want that income to be as secure as possible. Those distributions could be at risk, if you’re invested in the wrong operator. If a larger portion of the company’s income flows from one asset, you could be exposing yourself to more risk than you realize.
If that pipeline has a major rupture that causes great environmental and property damage, then it’s impact on operations would be substantial and could be compounded if the company’s business is saddled with a lot of debt. To avoid this risk, invest in a company with a diversified asset base and solid balance sheet. Further, look to see if the company’s largest asset is partnered with another company with an even stronger risk profile.
For example, Enterprise Products Partners L.P. (NYSE:EPD)’s major oil pipeline to the Gulf Coast, Seaway, is partnered with Enbridge Inc (USA) (NYSE:ENB). The 500-mile pipeline was recently reversed and is undergoing a major capacity expansion program. This partnership helps both companies mitigate some of the risk should the pipeline ever have a major, long-term disruption.