Dangling juicy dividends and ample liquidity at major institutional investors, shares of pipeline companies in North America have been selling at the fastest pace since 2017, and bankers say the market remains open for more.
After a slow start in 2023, sales of new and existing shares in the energy sub sector raised $5.7 billion, the most in six years, according to data compiled by Bloomberg. And pipelines are punching above their weight — with an additional $910 million added since Jan. 1, the total raised over the past 12 months accounts for nearly half of the $14.5 billion worth of volume in the broader oil and gas industry.
Investors have been eagerly snapping up the stocks, as firms are offering hefty payouts to shareholders. That’s a particularly attractive feature when interest rates are stuck above 5%.
Canadian pipeline operator Enbridge Inc. led the way with a $3.4 billion issue in September, and offers investors a mouth-watering 7.8% dividend yield. In 2024, Delek Logistics Partners LP — which offers an 11% dividend yield — raised $138 million.
“Any deal right now would be well received,” said Daniel Nowlan, vice-chairman and managing director, equity capital markets at National Bank Financial, about pipeline companies raising capital with stock issuances. “The market would definitely be open for any company of size that has good use of proceeds, or even a less exciting use of proceeds like paying down debt,” he said in an interview.
The combination of liquidity in the stocks and those hefty yields has made marketing the stocks easy.
“The yields, for sure, are helpful. There’s a lot of opportunities for people to pick up yield,” Nowlan said. National Bank was part of the underwriting syndicate in the Enbridge deal, in which he said, “many of the orders in that book were bigger than some of the deals in the last year.”
Sales of existing shares have also had a warm reception, with a unit of Apache Corp. selling $441 million of shares in high-paying Kinetik Holdings Inc., and Global Infrastructure Partners divesting Hess Midstream LP shares for $331 million. Both companies’ shares are trading above the offer price.
Momentum in pipeline stocks and partnership units is being driven by a wave of mergers and acquisitions, Truist Financial Corp. analyst Neal Dingmann wrote in a March 25 note. It’s an “exciting trend” which he expects to continue as there are “hundreds of private equity midstream companies and several public companies that could be M&A targets in the coming quarters.”
To be sure, pipeline company stocks have broadly lagged the gains in oil and gas producers, even when those hefty payouts are included on a total return basis. The S&P 500 Energy Index is up over 17% year to date on a total return, while the closely watched Alerian MLP ETF, has climbed just shy of 14% over the same period.
Paul Baiocchi, chief ETF strategist at SS&C Technologies, the firm that offers the Alerian MLP fund, thinks the gap should be narrower, given how oversubscribed many share sales have been.
“I do think there’s a disconnect between the primary markets and the secondary markets,” he said, adding that net flows into the fund of $717 million over the last three years are “good numbers, certainly, but not an avalanche by any means.”
Still, both the Alerian fund — which is made up of pipeline and midstream partnerships and currently offers a 7.4% dividend yield — and the Energy index are performing well enough to beat the broader S&P 500.
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