Partnering With Pipeline Protesters

Natural gas demand is growing across the U.S., and globally. U.S. crude oil is gaining market share and meeting most of the growth in demand, which is largely from developing countries. The midstream energy infrastructure sector continues to plan new projects to transport America’s growing output. Although growth capex probably peaked last year, substantial investments are planned this year. Williams Companies (WMB) estimates $2.4 billion in spending on new projects, including their proposed natural gas pipeline across New York harbor that was recently rejected.

Growth capex is the chief headwind to generating higher Free Cash Flow (FCF), a metric broadly familiar to generalist equity investors and likely to draw non-traditional buyers once FCF yields exceed the S&P500.

Moreover, recognizing the strength of opposition to new construction allows pipeline operators to enjoy stronger pricing supported by relative scarcity. They have a convenient excuse for their customers and regulators to justify profitable bottlenecks and constrained capacity. If the industry sought to create such conditions itself, an anti-trust investigation would surely follow. In fact, environmental opposition is providing the political cover to seek oligopolistic profits.

Building new infrastructure is in the DNA of every midstream management company. Their dislike of the Sierra Club is visceral. Investors have reflexively joined the criticism of those who would impede customers’ access to more oil and gas.

But on reflection, while we disagree with the virtue-signaling that governs much of the anti-carbon movement, we’ve concluded that, as investors in midstream energy infrastructure wanting higher FCF, our interests are more aligned than with company managements.

We want fewer new pipelines too. MLP investors might consider joining the next protest. The outcome could be better than you think.

Gas Pipelines having Problems Gets Built? Owner Description
Atlantic Coast Coin flip Dominion, Duke, Piedmont, Southern WVto VA & NC
Constitution Long shot Williams, Cabot, Piedmont, WGL PA to NY
Mountain Valley Perhaps EQM, NextEra, Con Edison,WGL, RGC WV to Southern VA
Northeast Supply Enhancement Doubtful Williams PA to NYC
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We are invested in WMB.

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