Pipelines Run Out of Gas

Duke Energy (NYSE: DUK) and Dominion Energy (NYSE: D), two of the nation’s largest utilities, have run out of gas on a pipeline project.

Back in 2014, the pair teamed up to build the Atlantic Coast Pipeline (ACP). The pipeline would have carried natural gas more than 600 miles through West Virginia, Virginia and North Carolina.

The project wasn’t particularly popular with environmentalists and ran into protests and legal obstacles almost from Day One. Because of those challenges, the cost of building the pipeline shot up from an estimated $4.5 billion back to 2014 to what ultimately amounted to more than $8 billion.

Considering that the project has dragged for more than six years, what was the straw that broke the camel’s back?

COVID-19.

As the novel coronavirus pandemic has swept the world, natural gas prices have been cut by more than half. While imported natural gas was selling at $2.80 back in November, right now the price is running at just $1.50, according to data from the U.S. Energy Information Administration. The average selling price for U.S. natural gas exports has fallen from $4.03 last year to $3.07 today.

Most of that price drop is due to less demand for natural gas since the pandemic has brought the global economy to a grinding halt.

That dollar decline in export prices might not sound like much, but the ACP was supposed to terminate at an export terminal. And back when the project began in 2014, natural gas was fetching an even higher price.

While environmentalists are taking a victory lap, and they did play a part in killing the pipeline, this was a basic economic decision.

What does this have to do with dividend investors?

The ACP was expected to bring in billions of dollars of revenue for the utilities.

Several analysts have already cut their long-term revenue and earnings forecasts for the two companies, which could have implications for their dividend growth. The money just might not be there.

This isn’t a death knell for the utilities or their dividend, but pipelines have generally been a low-impact way for these companies to grow their earnings. Sure, there’s a big capital investment up front. But once the pipelines are built, their owners basically act as toll collectors as the natural gas moves from Point A to Point B.

That just wasn’t in the cards for Dominion and Duke this time around. And as pipeline projects face more resistance from a variety of groups, even as energy prices have fallen, it might be a while before more pipelines are built.

Even if the outlook for utility dividends is dimming, you can still boost your income with a few quick, overnight trades.

Here’s to Profits,

Ben Shepherd