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With Plenty of Cheap Gas, It's Good to Be A Pipeline, Again

An abundance of natural gas and consequent low prices have helped turn the tide for long-haul pipelines. Where once there was worry, now there is opportunity, according to an analysis by U.S. Capital Advisors.

The fundamentals for long-haul U.S. pipelines "...are better across the board and the best we have seen in five years," U.S. Capital analyst Becca Followill and her colleagues said in their latest assessment of the sector.

According to 2014 data, aggregate earnings before interest, taxes, depreciation and amortization were up 5.8%, or about $400 million, from 2013, making for a second year of improvement. Return on equity climbed to 12.1% from 10.8% in 2013. That's the first increase the firm has seen in five years, U.S. Capital said.

Throughputs increased 6.9% last year on U.S. gas demand that increased 2.6%. The fastest-growing pipelines were Transcontinental Gas Pipeline (Transco), Tennessee Gas Transmission and Texas Eastern Transmission, all of which have exposure to the Marcellus Shale.

With plenty of gas coming from Appalachia and the promise of more, particularly from the emerging Utica Shale, Pipelines will have plenty of product to move.

"The dry gas Utica is just going to be massive," Followill told NGI, adding that the Marcellus "still has potential. It's some of the lowest-cost gas in the whole country."

When U.S. Capital looked closely at Appalachia infrastructure for a report about a year ago, the view was that there was probably going to be an overbuild of pipeline capacity, Followill said Thursday. With recent high-producing Utica wells, "...I'm not sure that's the case," she said. Since the report, there haven't been too many incremental capacity projects added to the roster relative to the firm's outlook for production, she said.

U.S. Capital also found that the average contract life of the pipelines considered is 1.8 years longer than one year ago. "With new long-term contracted projects coming online over the next several years, we would expect average life to continue to lengthen," the analysts said.

During earnings conference calls, executives frequently talk up the size of their project backlogs. For the first time in this annual analysis, U.S. Capital looked at pipeline company project backlogs as a percent of rate base and found that the top four were Columbia Gulf Transmission, Tennessee, Trunkline and then Transco.

In years past, there was concern where today there is enthusiasm. Investor worries used to include risk associated with changing gas flows and a more heavy-handed Federal Energy Regulatory Commission, according to U.S. Capital. For long-haul pipelines today, growth opportunities have replaced uncertainty, the analysts found.

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