November 6, 2015 / 8:55 PM / in 2 years

Keystone snub adds to gloomy prospects for pipeline companies

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.

Greg Reid, president of investment firm Salient’s MLP Complex, which has big pipeline holdings, has called for consolidation in a crowded playing field as a way for companies to bolster balance sheets during the worst downturn in years.

Some CEOs have spoken about what they call overcapacity in some oil fields such as the Permian Basin of West Texas.

On Thursday, two companies delayed or slowed pipeline projects. Sunoco Logistics, a unit of U.S. pipeline giant Energy Transfer , said the company was slowing development plans for an expansion project in West Texas, while Blueknight Energy Partners LP delayed building one in East Texas.

Their moves reinforced a sentiment voiced by other midstream operators.

In August, Magellan Midstream Partners, which runs two major Texas and Colorado oil pipelines in joint ventures with Plains, said it would be “hard-pressed” to see additional long-haul crude lines needed in the region.

On Wednesday, Plains chief Greg Armstrong told investors things were shaping up to be “more challenging ... than we expected.”

Winning environmental approvals for new pipelines is notoriously difficult.

A day before Obama rejected its Keystone XL line, TransCanada said it was scaling back plans for its Energy East project, which would carry crude from Alberta to Canada’s east coast and is opposed by environmental groups.

Its rival, Enbridge Inc, saw its Northern Gateway in British Columbia stymied by green and First Nations groups.

Alan Armstrong, chief executive of U.S. pipeline company Williams Partners LP, has mused that his company had to deal with several dozen agencies and local governments to build a pipeline in the Northeastern United States, but just one regulator to produce oil in U.S. waters. (Reporting by Liz Hampton, Kristen Hays, Anna Driver and Terry Wade; Editing by Diane Craft)

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