President Trump has issued an executive order to expedite pipeline approval process at the federal government level. The direct effect of the order is to shorten the timeline for the approval of the Dakota Access Pipeline (DAPL), which will transport crude out of North Dakota to the Midwest. There are still hurdles for this pipeline to clear, including a new environmental impact statement from the Army Corps of Engineers and possible litigation by groups that are opposed to the pipeline. Nevertheless, this order probably shortens the timeline for the pipeline to come into service. Midstream corporations and MLPs affected by this are the Energy Transfer Group (ETP, SXL, and ETE) and Phillips 66 Corporation. Two other midstream companies, MPLX and Enbridge, will be buying an interest in the pipeline upon completion. Their purchase will relieve balance sheet stress for the Energy Transfer Group of MLPs; and once the pipeline begins operating, it will help improve their operating cash flow, debt service coverage, and profitability.
Trump’s executive order also helped revive the possible construction of the Keystone Pipeline section that would facilitate the transport crude oil from the Canadian oil sands to the US market. Since the pipeline’s construction was first proposed, the economics of this project have changed, and now the decision to build will depend largely on whether there is sufficient demand from shippers and whether the project owner, TransCanada Pipeline Company, decides to go ahead and build. This executive order cements our view that President Trump is a proponent of pipeline infrastructure and the streamlining of regulatory procedure for building pipelines. It also indicates a lighter touch on regulation of energy generally by the new administration. However, keep in mind that states as well as the federal government have a role in regulating pipelines and energy projects.
President Trump has also announced his intention to renegotiate NAFTA with Canada and Mexico. For the energy business there are two possible concerns. The first is that there are a number of projects completed or under construction to transport natural gas from the US to Mexico in order to replace Mexican crude oil with cheaper natural gas for industrial uses including electric generation. In the event of a big change to NAFTA, how will the renegotiation affect demand for this natural gas, and how friendly will Mexico be to these projects? The completion of these projects would provide an additional nearby market for the US natural gas and help to relieve the current excess supply. It would also allow Mexico to sell more of its valuable crude oil overseas. In addition, Mexico has begun the process of opening up its crude oil and gas exploration and production market to foreign competition. Prior to these reforms, PEMEX, Mexico’s state-owned enterprise, had a monopoly on energy exploration and production. Whether these two issues will come up in the NAFTA negotiations is uncertain, but the Mexican government is likely to use what leverage it has to obtain the best deal it can for Mexico, and so it would not surprise us to see these issues brought up. It is impossible to predict an outcome, but these possible concerns should be carefully followed by investors in midstream energy transportation as well as in energy in general.
