Surging gas production coupled with the industry-wide expectation of long-term low gas prices is creating major opportunities for investment, said U.S. Capital Advisors (USCA) in its recent report, “Interstate Pipeline Review.”

“We would argue that the industry has not seen this large of an investment opportunity in 50 years,” USCA wrote.

Indeed, the new buildout cycle could dwarf the 2008 to 2011 cycle, USCA said. During that period, the industry invested about $22 billion on large-scale projects. In 2008 alone, the U.S. Energy Information Administration reported that 84 natural gas pipeline projects were completed in this country, adding about 4,000 miles of pipeline.

The USCA team has published a series of analysis pieces on long-haul interstate gas pipelines and regional interstate gas pipelines. The third report was designed to pull the information together and weigh company and market implications.

USCA found the following key takeaways:

  • The pipeline industry is highly concentrated. The top five companies make up 60% of the business’ market share;
  • Investment multiples are actually higher than many might assume. During the last three years, the industry spent $26 billion and realized a $1.5 billion increase in EBITDA, for a 17.5x investment multiple, USCA said; and
  • Throughput doesn’t necessarily predict EBITDA. Companies usually look to throughput as their metric for natural gas pipelines, but, USCA said, changes in throughput have a limited applicability to changes in EBITDA. Throughput is more of an indicator for demand on the pipelines themselves and the ability to secure additional contracts.

The new cycle promises to be even more robust. So much so, in fact, that USCA analysts have concerns about the industry’s ability to support the construction.

“We are starting to get a bit worried about the ability of companies to execute on such a large capex program, especially given the cost overruns, difficulty obtaining pipe and project delays experienced in the last cycle,” they said.

What all this could come down to is an increase in the separation between the “haves” and the “have nots,” USCA said.

“Pipelines are like real estate—it’s all about location. Pipes that tap Northeast supply are in the sweet spot; pipes that serve the western U.S., not so much,” USCA wrote. “That said, just like a strong economy lifts all markets, strong natural gas fundamentals are providing some nice opportunities for what would previously have been thought to be marginal pipelines.”

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