There’s a bidding war taking place in the resource sector…
Pipeline companies Spectra Energy (SE), Energy Transfer Equity (ETE), and Kinder Morgan (KMI) have all made bids to acquire rival firm Williams Companies (WMB).
Williams owns some of North America’s principal pipelines, including the largest natural gas pipeline system in the U.S. – the Transco pipeline system.
It runs 1,800 miles from South Texas to New York. Williams also owns the Gulfstream pipeline, a 745-mile pipe that carries natural gas under the Gulf of Mexico to Florida.
The contest for these assets highlights something that is often overlooked in today’s market – the value of pipelines…
[ad#Google Adsense 336×280-IA]As regular Growth Stock Wire readers know, new drilling techniques have allowed U.S. oil and gas production to surge in recent years.
Annual U.S. crude-oil production is up more than 70% since 2008.
Annual gas production is up 30% over the same period.
With this surge in production, the need for infrastructure to transport oil and gas has grown. An ample supply of oil and gas is useless if you have no way to transport it to refiners and customers.
That’s why we’ve seen hundreds of miles of pipelines built to transport oil and gas over the past few years. For example, my colleague Matt Badiali told you in May about the new pipeline system bringing oil all the way from Canada to Texas.
And as we’ve shown in these pages before, we expect U.S. oil and gas production to stay strong. To keep up with this massive amount of oil and gas, the U.S. energy infrastructure buildout will need to continue.
However, the actual value of pipelines continues to elude the market. It takes millions of dollars to build a single mile of new pipeline. But many companies’ pipelines are undervalued.
For example, Energy Transfer tried to acquire Williams in June. It offered $64 per share… a 32% premium to Williams’ share price at the time. However, Williams’ management rejected the offer, saying it wasn’t enough for the value of its pipelines.
If the Williams auction closes, we’ll get a better idea of the market value of these types of assets. Some pipeline companies could get serious upgrades in value… and become takeover targets like Williams – which would push their share prices higher.
The table below shows a few of these companies. Each of them increased cash (from operations) per share by more than 5% over the past 10 years. In short, they’ve proven their ability to generate cash using their pipes.
You can also see the companies’ ratios of enterprise values (market cap plus debt minus cash) and EBITDA (earnings before interest, taxes, depreciation, and amortization). The lower the ratio, the better. Finally, the table shows their debt-to-EBITDA ratios – again, the lower, the better.
I’m not saying all of these companies will be acquired – a takeover of $56 billion Enterprise Products Partners isn’t as likely as the others. But it’s still possible. Williams is trying to sell itself today for more than $50 billion.
I recommend looking into these names today. They’re all generating solid money from their pipelines… The value of their assets could soon increase… And they’re possible takeover targets. In short, their share prices are likely headed higher.
But don’t pay more than the sector average of 14.3 times enterprise value-to-EBITDA and 4.5 times debt-to-EBITDA.
Good investing,
Brian Weepie
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Source: Growth Stock Wire