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. Read on to find out more about investing in pipeline stocks, including the risks and returns.
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 four 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. Generally, there are two types of companies in this space: pipeline corporations and master limited partnerships (MLPs). Both are viable investment opportunities.
Why invest in pipeline stocks?
From 2019 to 2025, global oil production is expected to grow massively. 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 Australian 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.
Pipeline stocks
There are many stock options for Australian investors ready to buy into the pipeline category.
What ETFs track the pipeline category?
Exchange-traded funds that include pipeline companies typically track multicap energy master limited partnerships (MLPs).
Alerian MLP ETF (AMLP)
Energy Select Sector SPDR Fund (XLE)
ETRACS Alerian MLP Infrastructure Index ETN (MLPB)
Global X MLP & Energy Infrastructure ETF (MLPX)
iShares Global Energy ETF (IXC)
UBS E-TRACS Alerian MLP Infrastructure ETN (MLPI)
Compare trading platforms
Before you can invest in pipeline stocks, you’ll need a brokerage account in Australia. Review your options below.
Important: The standard brokerage fee displayed is the trade cost for new customers to purchase $1,000 of either Australian or US shares. Where a platform charges different fees for both US and Australian shares we show the lower of the two. Where both CHESS sponsored and custodian shares are offered, we display the cheapest option.
Bottom line
Australian 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 between five to 20 years — with their customers to help stabilize cash flow.
Enbridge (ENB) is one of the largest pipeline companies in the world by enterprise value.
Disclaimer: This information should not be interpreted as an endorsement of futures, stocks, ETFs, CFDs, options or any specific provider, service or offering. It should not be relied upon as investment advice or construed as providing recommendations of any kind. Futures, stocks, ETFs and options trading involves substantial risk of loss and therefore are not appropriate for all investors. Trading CFDs and forex on leverage comes with a higher risk of losing money rapidly. Past performance is not an indication of future results. Consider your own circumstances, and obtain your own advice, before making any trades. Read the Product Disclosure Statement (PDS) and Target Market Determination (TMD) for the product on the provider's website.
Shannon Terrell is a writer for Finder who studied communications and English literature at the University of Toronto. On any given day, you can find her researching everything from equine financing and business loans to student debt refinancing and how to start a trust. She loves hot coffee, the smell of fresh books and discovering new ways to save her pennies.
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