Which Large Oil And Gas Pipeline Companies Have A Positive Bias On Their Valuations? Research Analyst Carl Kirst Of BMO Capital Markets Reveals His Picks, As Part Of The 2011 Global Energy Review

Wall Street Transcript

67 WALL STREET, New York - November 30, 2011 - The Wall Street Transcript's 2011 Global Energy Review presents highlighted interviews from the past year, offering a long term perspective on the sector for serious investors and industry executives. The 2011 Global Energy Review contains expert industry commentary through in-depth interviews with 13 different public company CEOs, and 21 Equity Analysts. The full issue is available by calling (212) 952-7433 or via The Wall Street Transcript Online.

Topics covered: 2011 Global Energy Review

Companies include: Exxon (XOM); PetroChina (PTR); Petrobras (PBR); BHP (BHP); Chevron (CVX); Shell (RDS-A) and many more.

In the following brief excerpt from the 2011 Global Energy Review, interviewees discuss the outlook for the sector and for investors.

Carl Kirst, CFA, is Senior Research Analyst and Managing Director at BMO Capital Markets, where he covers the North American pipeline industry, a sector that operates throughout the natural gas value chain. Mr. Kirst began covering pipelines in 1993 as an Associate at Rauscher Pierce, and subsequently as a Senior Research Analyst Jefferies & Co., Merrill Lynch and immediately prior to BMO, at Credit Suisse Securities. In recent years, Mr. Kirst ranked number two and number three in the Greenwich Institutional Survey (2007, 2010), and number four runner-up in Institutional Investor's All-American Research Team (2007, 2010). He has a B.A. degree in economics and English from Rice University.

TWST: What are your top stock picks and are there any names you would stay away from right now?

Mr. Kirst: As far as our top one or two, our top name for the last 18 months since December of 2009 when we upgraded it, is El Paso and it's actually worked out exceedingly well. I still think there is some more outperformance to be had. It's up like 60% in the last 15 months; it's got less reward, but it's also got much less risk. There is still more risk to be taken out of the system, and that's going to lead to additional outperformance. But we've got a $19 price target on it, and the stock's at $17 now.

By the same token, another name that we like is Southern Union (SUG). Another pipeline company, a little bit more under the radar, but I would say it is, while not perhaps cheap, it is an inexpensive infrastructure play that still has some oil derivative exposure through natural gas liquids. I would say that stock is roughly $26, $27 with a price target of $31. But the excitement with Southern Union comes from the fact that things are not built into that price target. There is some small upside, $1 to $2 from infrastructure that's going to be ultimately required out of the Permian Basin in West Texas, and we think SUG is going to get their fair share of that infrastructure that needs to be built. Larger than that is, we think, a very low probability, but potentially highly material event, which is they've got an LNG terminal in Lake Charles, La., that is under a long-term 20-year contract to British Gas (BG.L). And there has been a trend over the last six months of LNG terminals looking at adding liquefaction to export natural gas.

Nine months ago, I think the conventional wisdom, and even what we wrote was basically, "good luck." There is still skepticism today, but I would say the tone is now everyone looking around saying, "Maybe this is actually becoming a viable possibility." As others seek to do it, it's just the read-through of maybe British Gas might be looking at doing this, too. And if BG does it, they would presumably do it in conjunction with Southern Union's Lake Charles plant. Again, I would put that as a very low probability, but if you followed that rabbit down the hole and said how much would it cost to do that and how would the contracts be structured, quite frankly you could have a potential impact of $10 to $15 future value for Southern Union. So with the stock at $27, that could be material. Even though it might be what I would tell you is a 5% chance right now, if that 5% were to happen, it would very much be additive to the stock. So the way we've approached it with investors is you do not buy the stock on this. You're buying the stock because the stock is at $26, $27, and we think the fair value is close to $31, and that's really what you could be targeting.

But in addition, there is this free option you're getting even if it's a very low probability event. Maybe through the course of the year, should others get the regulatory approval to do this - Freeport is looking to do this, even another LNG terminal on the East Coast, Cove Point, has thrown out there as far as a possibility. BG is the 800-pound gorilla in global LNG trade, and so it's a little bit like if these other guys are looking at doing it, why wouldn't BG be looking at doing this? And so that's more complicated than that. But that's one of the more interesting things for people who have some money who want to take a potential flyer on that option.

I don't know if there are any names that look to me so overvalued that we would be staying away from as far as actively, if you're in the stock, you need to get out. There are a lot of names though that I would just say are close to our fair value, good assets but close to our fair value. Spectra (SE) for instance, is $26; we've got a $26 price target. NiSource (NI) is almost $19; we've got a $19 price target. But there's certainly nothing negative on those companies. I think Spectra has got one of the best fleet of assets and management teams out there. I don't think it's overvalued, I just think it's fairly valued. Depending on what you're looking for, there isn't anybody that we'd say, get away from.

I think what will be interesting is what happens if there is another pipeline company coming back to market right now called Kinder Morgan (KMI) that went private back in 2007, and back then they were the largest pipeline company and was sort of the acknowledged management team leader, Rich Kinder. So it will be interesting to see what happens when presumably Thursday or Friday they become publicly traded again, and what kind of valuation they have and what kind of read-through does that have to our other pipeline companies. But generally, I would say it looks pretty good at this point. They are effectively playing the low-yield curve. There seems to be investor appetite, and we'll have to kind of see exactly where it falls out in trading, but would seem to be a positive bias out there to some of our larger pipeline companies - Spectra, Williams, El Paso, ONEOK (OKE) - on their valuations.

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