Risk-free pipeline projects make sense
Deborah Yedlin, Calgary Herald
Published: Tuesday, November 25, 2008
In the midst of the market mayhem, something surprising happened last week; two Calgary-based pipeline companies raised almost $2 billion from the debt and equity markets.
First out of the blocks was TransCanada Pipelines, tapping the public equity markets for a total take of $1 billion priced at $33 per share. The shares closed Monday at $32.22, up 27 cents.
Enbridge followed suit, raising $700 million in two tranches--$500 million and $200 million--each with different terms to maturity and in different business units.
The Enbridge deals were done privately, with the $500 million, 10-year paper pulled in from 30 separate institutional investors and priced at a reasonable 6.62 per cent. The remaining $200 million was by Enbridge Gas Distribution. The five-year paper was doled out to 32 investors and priced at 5.57 per cent.
All things considered, not bad rates given the liquidity squeeze in today's markets. A quick peek at a few indexes gives a bit of a hint on the relative comfort levels.
The S&P Oil and Gas Storage/Transportation Index in the U. S. is off 18 per cent so far this year, while the energy index in Canada is down 42 per cent year-to-date.
The difference in declines suggests that investors are more comfortable with the pipeline and transportation companies because it offers a way to play the energy sector without direct commodity price exposure.
On Monday, another company took advantage of prevailing market sentiment.
Keyera Facilities Income Fund raised $80 million through the issue of a convert ible debenture with a coupon of 8.25 per cent. Keyera is a midstream natural gas gathering and processing company and also falls under the infrastructure umbrella.
Contrast this with the $150 million failed convertible debenture issue by Oilexco last week, that was priced with a 15 per cent coupon and it's clear what investors are comfortable with these days.
The draw, according to Steven Paget at FirstEnergy Capital, is the safety in earnings offered by the pipeline and infrastructure players.
"They are generally conservative in what they do, it's a way to play energy without the commodity price risk, a way to play dividends and the companies represent hard assets," said Paget.
For anyone deigning to be the optimist amidst the market carnage, the fact investors are willing to buy into new debt and equity issues by companies that are inextricably tied to the energy sector, the success by Enbridge, TransCanada and Keyera might just be seen as a positive leading indicator.
Without continued investment in upstream exploration and development that result in hydrocarbons filling the pipes and processing facilities, it's tougher to make the numbers work.
Most of what has been raised is to support projects that will benefit from current and future upstream development. In other words, the drops in capital expenditures by upstream players already tabled for 2009 should prove to be a temporary phenomenon as markets rebalance.
In TransCanada's case, the proceeds will fund its commitments towards the Keystone pipeline. It should also be noted that in addition to the $1 billion equity deal the company is also in the process of putting a $1 billion credit facility in place. Rumour has it that this facility all but done.
From Enbridge's perspective, it has moved to term out other debt at an attractive rate. Paget says the move coincides with the company's construction activities relating to the Southern Access Pipeline which is being both expanded and extended.
But stepping back from all this, it's clear both companies and investors are taking long-term, bullish views of the North American energy sector. The pipeline companies are, after all, the midwives of the business -- facilitating transportation and delivery of commodities around the continent. This role was highlighted in a recently published report by the International Energy Agency, which noted that postponing energy-related infrastructure expenditures around the globe will cause further challenges in both the developed and developing worlds. In this context, then, it makes sense that investors are backing companies like Enbridge and TransCanada; all aspects of the energy business have long time horizons associated with them and this means not forging ahead during uncertain time isn't negotiable. It just has to be done. Much is made of the market's short-term mentality. Perhaps, if there is one silver lining in the current turmoil it is that it's time for investors to play for the long-term. It makes more sense for companies and it's good for the stability of the capital markets.
http://www.canada.com/calgaryherald/news/calgarybusiness/story.html?id=a...
