Investing in pipeline stocks is a unique opportunity to buy into the profitability of the oil and gas sector. But public opposition to pipeline infrastructure has the potential to interrupt projects and halt construction efforts.
What are pipelines?
Pipelines are the physical structures responsible for transporting natural gas, crude oil, natural gas liquids, petroleum and petrochemicals from production centers to refineries, docks, terminals, power plants and consumers. They are a core component of the oil and gas industry and without their infrastructure, the system would grind to a halt.
Pipelines can be divided into 4 subcategories:
Gathering. These lines gather products from wells and transport them to processing plants.
Feeder. These lines transport oil, gas and liquids from storage tanks and processing plants to transmission pipelines.
Transmission. These large pipelines can span more than three feet wide and are responsible for carrying oil, gas and natural gas liquids across state lines and country borders for processing or storage.
Distribution. These pipelines are responsible for distributing natural gas to homes and businesses.
Pipeline stocks are stocks from companies that build, operate or maintain energy pipelines.
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Pipeline stocks
There are many stock options for investors ready to buy into the pipeline category.
The pipeline industry in Canada accounts for around 8% of the country’s gross domestic product. More than 840,000 kilometres of pipeline have been laid out across Canada, and the sector employs between 100,000 and 200,000 people.
The US is home to the largest pipeline network in the world. And that network is poised for growth. From 2019 to 2025, US oil production is projected to grow by 46%. And this growth will require more pipeline infrastructure.
While it’s true that we’ve begun to experience a global shift towards green energy, we’re far from eliminating our reliance on gas and oil. Plus, many pipeline companies pay dividends, making pipeline stocks a practical portfolio addition for buy and hold investors.
Risks of investing in pipeline stocks
The profitability of pipeline companies depends on the price of oil and gas. And oil and gas prices can be unstable.
Pipeline companies get paid based on the amount of gas and oil they move. When the price of these commodities falls, drilling companies cut back their activity, well output declines and less oil and gas flows through pipeline infrastructures.
Another risk for investors to consider before buying into pipeline stocks is the rising opposition to new infrastructure. Investors should be aware of the environmental risk it poses.
Namely, pipeline leaks have the potential to contaminate water supplies. Pipeline protests can sideline construction efforts and delay projects, effectively reducing productivity and decreasing profits for companies and shareholders alike.
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Bottom line
Investors seeking a dividend-paying, long-term investment may find value in pipeline stocks. But profits in this category depend on the price of oil and gas and may be impacted by public opposition.
Pipeline companies make money by charging a fee for the oil or gas they transport. Fees are usually set by the barrel or unit. Pipeline companies often set up contracts — typically from 5 to 20 years — with their customers to help stabilize cash flow.
Enbridge (ENB) is North America’s largest pipeline company by enterprise value. The company’s market capitalization is approaching $100 billion.
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Shannon Terrell is a lead writer and spokesperson at NerdWallet and a former editor at Finder, specializing in personal finance. Her writing and analysis on investing and banking has been featured in Bloomberg, Global News, Yahoo Finance, GoBankingRates and Black Enterprise. She holds a bachelor’s degree in communications and English literature from the University of Toronto Mississauga.
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