Kinder Morgan, Enbridge, Union Pacific: Do Rails Trump Pipelines?

Kinder Morgan, Enbridge, Union Pacific: Do Rails Trump Pipelines?

A couple of high profile project cancellations have raised question marks over the attractiveness of crude oil and liquid petroleum pipeline companies such as Enbridge Energy Partners, L.P. (NYSE:EEP) and Kinder Morgan Energy Partners LP (NYSE:KMP) while making a strong case for rail haulage companies like Union Pacific Corporation (NYSE:UNP). Here is a closer look:

Kinder Morgan, Enbridge, Union Pacific: Do Rails Trump Pipelines?

Kinder Morgan Announcement

Earlier this month, Kinder Morgan Energy Partners LP (NYSE:KMP) announced that it would not move forward with its proposed Freedom pipeline project to ship crude oil from the Permian Basin shale play in Texas to refineries in Southern California after major West Coast refiners said they were not interested in taking oil from the project. This comes as a major blow to the $2 billion project that was announced in October last year. The company is now forced to explore the higher cost rail transport method. Understandably the announcement had a negative impact, though not very high, knocking off a couple of percentage points.

Kinder Morgan Energy Partners LP (NYSE:KMP) is a large company and its stock is not driven by an announcement of a project getting slightly derailed, but these small developments do offer good entry points in these high growth stocks. Kinder Morgan has corrected from its 52 week high of $91.6 in April to $85 but has a target of $102 from Deutsche Bank. Kinder Morgan’s forward price earnings ratio of 29.6 is slightly on higher side but offers strong future prospects with an excellent dividend yield of 6 percent.

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Similarly, Enbridge Energy Partners, L.P. (NYSE:EEP) faced a major setback for its $2.5 billion sandpiper pipeline project when the U.S. Federal Energy Regulatory Commission (FERC) rejected the company’s application for approval of a toll agreement. The 600 km pipeline would have linked the prolific Bakken Shale in North Dakota to a refining capacity in the U.S. Midwestern state of Minnesota. The FERC decision does not reject the project, but it has effectively pushed back the pipeline’s start-up target of early 2016, as Enbridge will now have to look into alternative ways of financing the project. Like Kinder Morgan Energy Partners LP (NYSE:KMP), Enbridge is a big company with a market capitalization of $9.3 billion and remains unfazed by these small setbacks but the development has certainly taken some sheen off this stock, which has gained less than 5 percent over the last quarter, thus underperforming the markets. The loss in stock price is compensated by the boost in dividend yield. At $29.6, it offers a yield of 7.3 percent while fundamentals are also strong. Forward price earnings ratio of 23.3 and debt gearing of 1.37 are indicative that the stock is in line with market valuations.

While the Party Lasts

On the other hand, stocks of railroad companies such as Union Pacific Corporation (NYSE:UNP) are surging as it becomes clear they are the winners, at least in the short term. More than half the oil produced in the prolific Bakken Shale in North Dakota is transported through rails, as pipeline capacity is just not there. Union Pacific Corporation has surged 15 percent over the quarter. The company does not provide a break-down of its profits but it is not difficult to see that better rates for transporting Bakken crude shipments is one factor behind the 10.9 percent growth in net profits during the latest quarter. In line with improving finances, the stock has also advanced but forward price earnings of 14.5, coupled with a low gearing of just 0.5 means there is a lot more to come.

Rail shipping is more costly than using pipelines, but transporting crude oil by rail offers shippers and consumers more flexibility as the infrastructure is already in place. It is essentially a stopgap measure but until enough pipeline capacity is installed, companies such as Global Partners stand to benefit. Given the significant cost benefits pipelines offer over railroad transportation, there is no denying that prospects of pipeline companies are bright. However, long drawn requirements of pipelines such as 20-year contracts swing the short term balance in favor of railroad companies.

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