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Energy Analysts Tout I-Grade Pipes

As prices of oil and gas continue to drop, energy analysts on the buy- and sell-sides expect spreads on bonds of oil and gas pipeline companies to tighten considerably through the rest of the year. Ross Payne, analyst at First Union Securities, says bonds of pipeline companies such as Kinder Morgan, Northern Border Partners and Enterprise Products Partners should benefit as they have locked in three- to four-year contracts with drilling companies that were negotiated when volumes were robust. They are fully sold out for the next two years--more than enough time, he says, to weather the current fall in prices.

Last week, Kinder's 6.75% notes of '11 (Baa1/A-) were bid at 175 basis points over Treasuries, Enterprise's 7.5%s of '11 (Baa2/BBB) were bid at 235 over the curve, and Northern Border's 7.1% notes of '11 ( Baa1/BBB+) were at 200 over. Payne expects them to trade 15 to 25 basis points tighter by year-end, and to outperform exploration and production (E&P) companies by the same amount.

Joe Messina, analyst at American General, says he likes all the pipeline companies except for El Paso, because it has significant exposure to overcharge accusations filed with the Federal Energy Regulatory Commission. He says pipelines have historically outperformed the rest of the energy sector during cyclical downturns. American General has been trying to increase its pipeline exposure, but has not yet received an attractive enough offer from dealers in pipeline credits. He declines to say at which price American General would buy bonds of any of the pipeline companies.

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