Market Overview

How to Play the Pipeline Component Shortage


Over the weekend, Reuters released a report on a potential developing shortage in pipeline components due to a boom in inland oil output.

"Amid an unanticipated boom in inland oil output that turned the domestic market upside down last year, firms from Enterprise Products Partners (NYSE: EPD) to Shell Pipeline and Plains All American (NYSE: PAA) have launched a $20 billion bonanza to build, expand or reverse two dozen pipelines in the past year."

The significant pickup in activity, however, may be putting a strain on companies that make pipeline components. "The supply chain hasn't quite caught up," said Terry McGill, president of Enbridge Energy Co Inc, the U.S. division of Canadian pipeline giant Enbridge.

Reuters reports that after decades of moving oil inland, pipelines must now flow in the opposite direction to accommodate output from Canada and recently discovered shale fields. The result has been large capital expenditures from some of the world's leading energy companies. "You're not just connecting in to existing grids," Enbridge's McGill said. "The grid is being built."

This should lead to increased revenues for suppliers who are receiving large orders and are able to raise prices. "The price just goes up the more projects are out there," said Leon Zupan, president of gas pipelines for Enbridge's U.S. division. "Whenever you need big castings for pumps or valves, there's only so many people who can do it." Two companies who could potentially benefit are SPX Corporation (NYSE: SPW) and Flowserve (NYSE: FLS), which are both suppliers of pipeline components.

The Reuters piece notes that for SPX "valves and pumps make up part of its fast-growing global flow technology business that the company has said it expects overall to contrbute $1 billion to sales this year." Flowserve has said that it has seen "significant project activity" in its North American oil and gas, chemical, and power markets."

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