The New Thing in Energy Is Old Pipes

(Bloomberg Opinion) -- There’s gold in them thar holes.

That’s my stab at an elevator pitch for oilfield-services veteran Andrew Gould’s latest venture. The former Schlumberger Ltd. CEO’s investment vehicle, Sentinel Energy Services Inc., announced Friday it will buy Strike LLC, which specializes in maintaining and repairing pipelines. Once the $854 million deal closes, Strike will become a public company.

It is interesting that Gould, having no doubt scanned a wide range of potential targets across the services sector, settled on this relatively mundane corner of it. He isn’t the only one, either.

Earlier this month, First Reserve Corp., a large private equity firm specializing in energy, completed the acquisition of Dresser Natural Gas Solutions from Baker Hughes, a GE Co. Dresser NGS makes natural-gas meters and pipeline-repair equipment. It’s the sixth investment made by First Reserve’s most recent fund in the area of energy infrastructure integrity.

This sector is – and I mean this as a compliment – a bit like fungus: It grows on decay. The U.S. oil and gas business is one of the oldest in the world, and it has the pipes to show for it. More than half of the crude oil and refined product petroleum pipeline network, as well as the natural-gas transmission network, is more than 50 years old, according to data from the Pipeline and Hazardous Materials Safety Administration. The much longer natural-gas distribution network is a little more sprightly; even so, almost half of it predates the Reagan Administration.

The New Thing in Energy Is Old Pipes
The New Thing in Energy Is Old Pipes

Old pipes aren’t necessarily accidents waiting to happen. But, like any aged piece of infrastructure, they can be if their upkeep slips. And in this business, that can carry big costs in terms of cash, reputation, the environment and even lives.

For example, in this chart produced by the Association of Oil Pipe Lines in 2015, America’s older crude oil and refined product pipelines account for a disproportionate share of leaks. In particular, while the Sixties may have been great for many other things, welding wasn’t one of them.

The New Thing in Energy Is Old Pipes

So there’s a deep inventory of energy infrastructure to fix, replace, and monitor (prevention is always preferable to a cure). This helps (helpfully) to distance this business somewhat from the commodity cycle. The gas distribution segment of the market is especially noteworthy. Upgrades, including such things as smart meters, get added to gas utilities’ regulated rate base, providing steady, long-term investment and revenue opportunities. This has made these networks very desirable for electricity providers facing stagnant power demand. In a sense, First Reserve’s Dresser deal fits with the spate of acquisitions of gas networks by the likes of Southern Co. and Duke Energy Corp. in recent years.

When Strike makes its stock market debut (probably early in 2019), it will offer a combination of the relatively steady maintenance business, as well as growth potential from new infrastructure being built to ease the bottlenecks around the Permian shale basin. In that way, it may attract investors who once owned master limited partnerships for a similar sort of exposure.

It should also carry scarcity value. One of the reasons private equity likes the sector is that many of these businesses fly under the radar as privately owned firms or divisions buried within larger companies. There are few pure-play companies of any scale in which to invest. One of them, Primoris Services Corp., clocks in with an enterprise value of $1.4 billion and lists a grand total of five analysts covering the stock. It currently trades at 11.5 times forward earnings, its widest discount to the S&P 500 in several years:

The New Thing in Energy Is Old Pipes

The quiet roll-up of the sector may force a reappraisal of such stocks. As any plumber will tell you, fixing pipes may not be the sexiest job in the world, but it pays pretty well.

Update: An earlier version of this story referred to First Reserve as “First Energy” on second reference.

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

Liam Denning is a Bloomberg Opinion columnist covering energy, mining and commodities. He previously was editor of the Wall Street Journal's Heard on the Street column and wrote for the Financial Times' Lex column. He was also an investment banker.

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