Keystone snub adds to gloomy prospects for pipeline companies

Fri Nov 6, 2015 3:54pm EST
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HOUSTON Nov 6 (Reuters) - North American pipeline companies are at a crossroads. Once the darlings of investors, their growth prospects have been undercut by a 50 percent slide in oil prices and tough environmental reviews that have delayed projects.

President Obama's rejection on Friday of TransCanada Corp's proposed Keystone XL oil pipeline, while expected by many, highlighted difficulties that have been nagging the sector for months.

"It's not good news for the midstream sector," said Skip York, an oil analyst at Wood Mackenzie.

Pipeline companies have been especially popular with investors in recent years for their ability to consistently pay out and grow large dividends.

But their attractiveness has faded since at least this summer as executives at some of the biggest pipeline companies, including Plains All American LP and Kinder Morgan Inc , have warned of slower or variable dividend growth.

The main reason is that oil producers are cutting back investments, so there may be less additional new volumes of crude for the pipeline companies to carry and charge fees on in the future. This is already hurting demand to build new pipelines.

"In an environment where commodity prices are low ... it's more challenging and more expensive to raise capital. That all makes it harder to grow," said Jeff Birnbaum of Wunderlich Securities in New York.

While revenues from existing pipeline flows are seen as safe, the cloudy outlook for new revenue has prompted investors to dump shares of midstream companies.

The Alerian MLP index, the benchmark for the sector, has fallen 32 percent over the last year.   Continued...