Energy pipelines back in investor favour after Trump’s orders

Investors have rushed back into North American pipelines after US President Donald Trump revived growth prospects in a sector that struggled to cope with a two-year oil price slump and strident opposition from environmental and Native American activists.Investor confidence in the industry was shaken last year when the administration of former president Barack Obama halted the $3.8bn Dakota Access Pipeline, just as Energy Transfer Partners had nearly finished building it.Protesters have rallied for months against plans to route the Dakota Access pipeline under a lake near the Standing Rock Sioux reservation in North Dakota, saying it threatened water resources and sacred Native American sites.A year earlier, Obama rejected TransCanada Corp’s C$8bn ($6.08bn) Keystone XL project, which would ship oil from Canada to US refiners.Trump sought to smooth the way for both projects with executive orders on Tuesday as he made good on campaign promises to drive infrastructure investment throughout the world’s largest economy.The orders sparked a rally in indices that track pipeline companies to a more than 14-month high.The shares of firms that build the pipelines and storage tanks such as Magellan Midstream Partners and Enterprise Products Partners have rallied as much as 9% in the days following Trump’s orders.Those gains came on top of a rally of about 13% in these firms since Trump’s surprise election victory on November 8.“Energy companies can invest more confidently over the next four years with less concern over federal delays,” said Libby Toudouze, a portfolio manager at Cushing Asset Management.The firm manages around $2.7bn of investments in pipeline and energy transport and storage firms.“I do think we are going to see a good consistent flow of new investors coming into this (pipeline) space for next 3-5 years.”The top picks for investors include Valero Energy Partners LP, Phillips 66 Partners LP and MPLX LP.Energy infrastructure companies, once a darling of the industry, had languished in 2015 and early 2016 as oil prices plummeted to multiyear lows.These firms, often structured as master limited partnerships (MLPs), are typically the vehicles used by investors to gain exposure to the pipeline industry.MLPs are a tax-exempt corporate structures that pay out profit to investors in dividend-style distributions.Investors have funnelled billions of dollars into the infrastructure industry through them since the shale boom began.The Alerian MLP index, which tracks a number of pipeline firms including Magellan, Enterprise, Energy Transfer Partners and Plains All American Pipeline LP, has risen more than 17% since Trump’s election, including a 6% rally this week to the highest level since November 2015.The pipeline sector has outperformed both oil and gas producers and the S&P 500 index, which have risen about 13% and 7.5%, respectively, since the US election.“You don’t have to take a lot of risk in the MLP space at this point to make outsized returns... so it’s an interesting time and a unique opportunity in the MLP space,” said Matt Sallee, a portfolio manager at Tortoise Capital.The Alerian index rose 9% in 2016 as oil prices rose, Opec and non-Opec exporters announced supply cuts, and on Trump’s election.That came after a crash of more than a third in 2015.Mutual and exchange traded funds’ investment in MLPs crashed to $3.8bn in 2015 before recovering to about $6.2bn last year, according to Morningstar.The revival in US shale activity sparked by the recovery in oil prices has also given pipeline companies a boost and opened the way to further development.Significant challenges remain – activists plan to take their fight to the courts on a state-by-state basis, which could bog down future developments.But for now, investors see room for the value of pipeline firms to go higher.“We think drilling is going to expand in the US and will need plenty of new infrastructure, particularly in the Permian Basin,” said Jay Hatfield, portfolio manager of the InfraCap MLP ETF.MLPs were around 60% undervalued compared with BBB bonds which usually fetch the same yield, he added.Already, pipeline companies such as Plains All American have announced large deals and expansions in the Permian, the biggest shale play in the United States.