Investing in the Dakota Access Pipeline
A pipeline boom is underway
Dakota Access LLC is a small pipeline company based in North Dakota.
The firm, a subsidiary of Energy Transfer Partners (NYSE: ETP), has big plans to connect the Bakken crude oil formation with the rest of the United States.
The company's Dakota Access Pipeline, a 1,134-mile and 30-inch-diameter infrastructure project, will swing through the Bakken oil patch and traverse North Dakota, South Dakota, and Iowa and finish in Illinois:
As you can see, it's quite an undertaking, but once completed, it will ship about 450,000 barrels of oil per day. That number could go as high as 570,000 barrels.
Chuck Frey, the company's vice president, says the pipeline already has contracts for 405,000 barrels a day of crude, and another 45,000 are still available.
Financially, the pipeline will provide another boon to North Dakota's already bustling economy...
It'll add an additional $55 million per year in property taxes to the states it passes through, and it will boost local revenues by an estimated $156 million.
This doesn't even include the massive amounts of economic activity spurred by the construction of the pipeline.
Of course, many people (and other companies) aren't too happy about this project. Several landowners met at a Public Service Commission hearing in North Dakota on Monday to decry the pipeline.
Some have even consulted lawyers in the hopes that if they can't stop the pipeline's construction, they can at least squeeze some more money from the easement process.
Still, the general consensus is that the pipeline will live to see the light of day. If all goes according to Dakota Access's plan, then the line will start construction later this year and be ready for shipments by the end of 2016.
And even though landowners and even Enbridge (NYSE: ENB) — because of its Sandpiper Pipeline — dispute the Dakota Access line, it's a much-needed addition to North Dakota's energy infrastructure.
Crowded Rails Kill Productivity
The chief reason North Dakota needs a massive project like the Dakota Access Pipeline is crude-by-rail traffic.
As we've seen (and covered) over the last few years, crude oil trains, mainly out of North Dakota, have caused a series of derailments and fiery explosions. In some cases, people have died because of these crashes.
In other instances, explosions caused evacuations of towns and destroyed buildings.
It's only a matter of time before more of these disasters happen and destroy more homes, businesses, and lives.
The thing is, North Dakota ships about 650,000 barrels of oil each day from the Bakken via rail, so if the Dakota Access Pipeline is built, it could alleviate 450,000 barrels of it. That would allow much-needed breathing room for shippers worried about the safety of oil and the people it travels near.
Also, it would reduce costs since pipelines, once built, are more financially efficient for shippers that need oil fast and without incident.
When rails are less crowded with oil, other pieces of the North Dakota economy improve, too.
You see, North Dakota was an agricultural power long before its oil-producing status, and now that oil crowds the rails, the price for corn shipments has gone up dramatically.
Farmers have to pay a premium to get their product shipped so it won't rot in storage silos — although a lot of it still does.
When the rails are less crowded, corn prices will go down, and food will be cheaper in the upper Midwest, while farmers can breathe a sigh of relief and turn larger profits again.
Other than rails, North Dakota needs the Dakota Access Pipeline because it has fallen behind Texas in terms of energy midstream infrastructure...
The thick concentration of pipelines in Texas come from a history of oil production and access to the Gulf Coast, where the nation's refineries are at their densest concentrations.
Plus, it's easier for Texas producers to push pipeline approvals through because most pipelines start and end within the state. Unlike North Dakota, where a pipeline has to traverse several states before it reaches a refinery or another pipeline route, Texas can build one from the Eagle Ford to the Gulf Coast for peanuts.
However, if the Dakota Access line is built, Bakken producers will have caught up to Texas in a big way and will have access to major refineries on the Gulf. It'll improve oil production and cost efficiency for the producers and shippers hardest hit by the bear market.
Plus, it'll provide energy investors with a decent payday...
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The Cheaper, Better Way to Play the Pipes
As I mentioned earlier, Energy Transfer Partners is the parent of Dakota Access and is itself a decent company for investors who like safety.
It pays a 7.3% annual yield and has a network of pipelines and midstream investments in the United States.
However, the company costs about $56 per share and won't see too much in the way of profits off of Dakota Access for many years.
Don't get me wrong; an investment in Energy Transfer Partners isn't a bad idea. It's just not the best way to make money off of North Dakota's pipeline expansion.
Instead, there's a company that could profit from this project and several others while they're being built. No waiting for shipment revenue to balance debt from the project, no predetermined contracts that could fall through.
This company makes its money during the construction of pipelines and then possibly later after completion as well, when the pipeline needs inspection or integrity tests.
What's more, this company trades for a fraction of the price of Energy Transfer Partners and pays a larger 9.4% yield.
In my opinion, it's a much better choice for investors who want to take advantage of pipeline expansions like this.
I've been following this company for some time. You can see my report on it right here.
Until next time,
A true insider in the energy markets, Keith is one of few financial reporters to have visited the Alberta oil sands. His research has helped thousands of investors capitalize from the rapidly changing face of energy. Keith connects with hundreds of thousands of readers as the Managing Editor of Energy & Capital as well as Investment Director of Angel Publishing's Energy Investor. For years, Keith has been providing in-depth coverage of the Bakken, the Haynesville Shale, and the Marcellus natural gas formations — all ahead of the mainstream media. For more on Keith, go to his editor's page.
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