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Pipeline Companies Are Partnering Up to Avoid Repeating Their Past Mistakes

Matthew DiLallo, The Motley Fool

The pipeline industry has experienced several high-profile setbacks in recent years as opposition from environmentalists and other groups has delayed the construction of key expansion projects. Those issues have cost their developers billions of dollars in added costs and lost revenue. It has also made it costlier and riskier for energy companies to pursue new projects.

That's making major pipeline developers much more cautious as they seek to avoid the potential pitfalls of a major project delay. Instead of going it alone to develop new large-scale projects in hopes of reaping the entire reward, more pipeline companies are seeking to offload some of the costs and associated risk by bringing in partners, giving up a share of the return potential in the process.

Two people shaking hands with an energy facility in the background.

Image source: Getty Images.

Not getting burned again

Canadian pipeline giant TransCanada (NYSE: TRP) has experienced the industry's growing pains firsthand. The company made headlines a few years ago as opposition grew against its proposed Keystone XL pipeline, which would have moved oil from Canada's oil sands region toward the U.S. Gulf Coast. The intense resistance to the project ultimately led the Obama administration to deny a key permit needed to build that cross-border pipeline. That situation prompted TransCanada to turn its attention toward developing an oil pipeline across Canada. However, it ultimately gave up on that pipeline due to growing opposition as well as the Trump Administration's decision to resurrect Keystone XL.

After being burned by the delays of those large-scale pipelines, TransCanada is shifting its strategy as it moves forward with construction on the Coastal GasLink pipeline, which would transport natural gas to a liquefied natural gas (LNG) export facility under development along Canada's west coast. Instead of funding the entire 6.2 billion-Canadian-dollar ($4.7 billion) project, TransCanada has hired advisors to find buyers for a majority stake in the development. The company could sell between 51% and 75% of Coastal GasLink, which would offload not only that funding commitment but the risk associated with the project. Protestors have already halted work on the pipeline within the past month, driving concerns that there could be more opposition in the future, which could impact the project's timeline and costs.

TransCanada is also considering bringing on outside partners to help fund the construction of the Keystone XL pipeline. While the project is still awaiting a new U.S. environmental review, the company hopes to start construction this year. However, given the past opposition to the pipeline, TransCanada wants to mitigate its risk so that any future delays don't weigh solely on the company.

A person in a hardhat standing near a stack of pipelines.

Image source: Getty Images.

Learning a lesson the hard way

Project delays have also burned Energy Transfer (NYSE: ET) in the past. The company was the lead developer and 75% owner of the controversial Bakken Pipeline system. Opposition to the project delayed its in-service date by months, costing the company revenue while adding to its expenses. It also impacted Energy Transfer's ability to access funding because the company couldn't close on a construction loan as well as a transaction to sell a minority interest in the project until it received a key permit, which further added to its costs, since it needed to pay a high price to obtain some alternate financing.

Because of those past issues, Energy Transfer is taking a different approach to its latest oil pipeline. For starters, the company is working with three other companies, including MPLX (NYSE: MPLX), on the Permian Gulf Coast project to spread out the risk and funding requirements. On top of that, Energy Transfer has shifted away from its previous business model of paying out nearly all the cash it collects to investors and is instead retaining more of that money so that it can self-fund a significant portion of its expansion spending. This new approach should enable Energy Transfer to avoid finding itself in another tight spot in which delays to a key project impact its ability to operate. 

Meanwhile, this strategy shift by major pipeline developers has opened up the door for companies like MPLX to evolve their business models. In the case of MPLX, it has had the opportunity to participate in the development of several long-haul pipeline projects that likely wouldn't have been available to it in the past. That's providing MPLX with a new source of growth as well as diversifying its revenue stream. 

Offloading risk to reduce its impact

For several years, pipeline companies typically developed and funded large projects by themselves because that approach enabled them to grow faster. However, with opposition to new pipelines increasing, companies can't risk going it alone anymore, which is why the industry is increasingly seeking to work together on key projects. While this strategy shift likely means that pipeline companies won't grow their dividends quite as fast in the future as they did in the past, it will help reduce risk, which should improve the sector's appeal to more risk-averse investors.

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Matthew DiLallo has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.