Southern Cross

 

There’s a simple fact we kept bringing up over and over again during the midstream sector’s recent dark days. It is that energy pipelines are vital not only to the oil and gas drillers, but also to every U.S. power consumer and producer, effectively the entire economy.

That didn’t, of course, stop the pipeline equities from trading for a time as if their worth depended on the solvency of the unluckiest two-bit wildcatter. But facts are stubborn things, and the reliably enormous U.S. demand for power and fuel kept pipelines humming until the market reconsidered.

Now that demand is starting to reshape suppliers, as cash-rich and richly valued utilities invest some of that green in the pipelines that feed their power plants. In the most notable such partnership to date, Southern (NYSE: SO) and Kinder Morgan (NYSE: KMI) announced last week that the southeast U.S. utility would pay nearly $1.5 billion for a 50% stake in Kinder Morgan’s Southern Natural Gas pipeline system.

Southern, which recently spent $12 billion to acquire a natural gas distributor, is already the largest customer of the pipeline it’s buying into. As part of the deal, the companies agreed to jointly pursue a number of expansion projects on the pipeline starting next year.

The deal will help Kinder Morgan deleverage a little faster than previously expected, and that certainly played a role in the stock’s 19% rally over the next seven sessions leading up to last night’s earnings results.

But even more important than the money itself is confirmation that pipelines is where Southern and many of its peers will want to spend it, both to diversify from power generation and to ensure that their power plants will get their share of natural gas that may not always be as plentiful as it is today.

As for Kinder Morgan, it remains a Growth portfolio Hold despite the trading range breakout, already valued more highly than the multiple Southern paid for some of its best pipes. But it does suggest the company won’t lack for potential partners or demand-driven expansion opportunities.

Stock Talk

Add New Comments

You must be logged in to post to Stock Talk OR create an account