The Last American Pipeline

…will also very likely be its most profitable

It’s been nearly six years since its stop/start construction began. But sometime in early 2024, the 303-mile Mountain Valley Pipeline will finally start shipping Appalachian natural gas to energy-hungry markets in North Carolina and Virginia.

The latest delay finishing MVP will cost its owners another $500 million. Lead developer Equitrans Midstream (NYSE: ETRN) blames that on the ramp-up in the contractor workforce being “slower and more challenging than expected, due to multiple crews electing not to work on the project based on the history of court-related construction stops, and the inability to recruit crews with required and sufficient experience.”

One can hardly blame construction companies being hesitant to deal with this project. Well-funded opponents had succeeded in tying up MVP for years in the courts by literally disputing every previously granted permit. Only brinksmanship from Senator Joe Manchin (D-WVA) broke the logjam, insisting on Congressional legislation to override all challenges as the price of his vote to extend the federal debt limit this year.

Even after that agreement was reached, the Pipeline and Hazardous Materials Safety Administration (PHMSA) threatened to throw another monkey wrench into the process, charging that Equitrans had not properly stored materials and equipment while construction work was suspended. That hurdle too was ultimately overcome with an October Consent Agreement from PHMSA. The company agreed to take additional steps to enhance “existing coating, remediation and inspection processes.”

Manchin’s gambit on behalf of MVP has hardly made the path to pipeline construction any easier elsewhere, other than for incremental projects designed to “debottleneck” transportation. Capacity meant to serve LNG exports has also been given a relatively easy ride, as the Biden Administration has prioritized supplying Europe and to some extent Asian markets. But opposition even to pipelines already in service is fierce as ever.

Earlier this month, protesters against Energy Transfer LP’s (NYSE: ET) Dakota Access Pipeline lost their Fourth Amendment case at the US Court of Appeals, in which they claimed “excessive force” was used against them. The 1,172-mile oil pipeline’s long-term fate, however, remains in limbo, as a court-ordered environmental impact study stopped short of recommending granting an easement necessary to continue operating. And despite providing a vital energy link to the Midwest US since March 2017, there’s still a risk courts will order it shut, whatever chaos such a decision may sow.

Throw in the fact that capital markets are still hostile and the risk of a potential recession depressing system volumes and it’s small wonder US midstream companies aren’t building. That’s despite the obvious and growing need for new energy transportation capacity in the most energy-hungry regions.

New England, for example, will have to depend on pricey LNG imports in winter for the foreseeable future, despite the presence of cheap Appalachian gas just a couple hundred miles away. The region can’t count on offshore wind to bridge its energy void any time soon, with every project but Avangrid Inc’s (NYSE: AGR) Vineyard 1 now shelved. And NIMBY opponents still pose meaningful risk to that company’s electric transmission project to import Canadian hydropower as well.

Equitrans’ regional rival Williams Companies (NYSE: WMB) has a series of ongoing projects to expand the capacity of its natural gas transportation network serving Middle Atlantic states. But it’s clear the era of big pipeline projects is dead. And MVP—along with TC Energy’s (TSX: TRP, NYSE: TRP) now “mechanically complete” Coastal GasLink in British Columbia—is the last of its kind.

Now the good news for investors: Growing scarcity of energy transport capacity is likely to make MVP and CoastalGas Link the most profitable pipelines in history.

True, both projects wound up costing well more than initially estimated. Even assuming no additional meaningful hurdles, MVP’s current all-in estimate is $7.2 billion, versus $3.5 billion in February 2018 when construction began. Coastal GasLink is currently “on track with the approximately CAD14.5 billion cost estimate,” according to management. That’s about $10.6 billion, versus an initial CAD6 billion ($4.4 billion) projected price tag.

Future pipeline projects, however, will face even worse cost escalation economics. That’s the unmistakable message from the massive projected cost increases forcing mass cancellation of US offshore wind development the past few months, as well as the scrapping of NuScale Power’s (NYSE: SMR) small scale nuclear project in Utah earlier this month.

Any project that requires tons of steel, highly skilled labor and years to acquire needed permits is subject to massive cost inflation risk. That puts a hefty premium on the value of what does eventually get built—and arguably especially in the oil and gas business, where the public is grossly underestimating the need for future supply.

MVP is currently 48.8 percent owned by Equitrans. That’s the result of an increase from an agreement to absorb additional project costs. The rest is owned by a quartet of utilities: NextEra Energy (NYSE: NEE) at 30 percent, Altagas Ltd (TSX: ALA, OTC: ATGFF) at 10 percent, Consolidated Edison (NYSE: ED) at 10 percent and RGC Resources (NSDQ: RGCO) at around 1 percent.

I expect a dramatic ownership shakeup within 12 to 18 months of MVP entering service. Mainly, all four utilities are likely to monetize their interests in order to fund massive capital spending opportunities in their regulated businesses. And a number of midstream companies are certain to be interested in acquiring stakes in North American energy’s hottest commodity.

That includes Williams Companies, which already has a considerable presence in regional energy transportation infrastructure. Energy Transfer LP may also be interested, given its already prolific series of midstream acquisitions the past couple years.

Appalachian producer EQT Inc (NYSE: EQT) may have the most to gain from consolidating MVP, after locking up 60 percent of the pipeline’s shipping capacity under long-term contracts. The company has already successfully consolidated two midstream companies serving its wells, thereby cutting costs and improving efficiency. And acquiring its former unit and most important midstream service provider Equitrans—along with its 48.8 percent MVP ownership—would arguably do far more.

That would be an ironic turnabout for EQT CEO Toby Rice, who waged a successful management battle in the previous decade in part to divest Equitrans’ midstream assets. But you can’t argue with the timing: Equitrans currently sells for less than half what it did at its launch in 2018. That’s even as the company is on the verge of its greatest operating achievement yet—bringing what’s likely America’s last pipeline back from the dead.