Canadian pipelines—worthy a position?

Bear with me as I set a background to understand the environment that Canadian pipelines face.  I recently watched an interview with former Prime Minister Stephen Harper speaking about his new book. Here is the interview. This may appear a political comment, given my reference to Harpers book. But it is important to set the background for this industry, which is particularly affected by political decisions.

Mr. Harper’s book focused on the international move into extreme left-wing governments over recent times– and the current slow but steady move away from them again and into populist conservatism. Canada saw its own wave of left-wing governments elected in the prior election rounds –(Federal and provincial)- driven by special interest groups (large unionized corporations, public servants, environmentalists, religious groups, “SJW’s”, etc). This move to the left was not unique to Canada – it had been happening across the globe. And now, it isn’t just Canada that is seeing a slow migration back to free-market politics – that reversal is also happening across the world.

To quote Harpers book: “Populist, nationalist, and anti-establish­ment movements are continuing to grow. Just look at Europe. A late 2017 analysis of 22 European countries revealed that support for such parties is at its highest level in at least three decades. Recent votes in the Netherlands, the U.K., France, Germany, Italy, and else­where have seen such options make significant gains.”

Hey…this isn’t a political blog….Why make note of this development? Simple answer: ultimately, government interference, or lack of it, will  influence all businesses – including publicly traded companies. Especially – pipelines.  And that affects you and I as market participants. Say what you will about radical populist politicians like Trump, voted in not so much as a reaction to Obama, but more a reaction to the far left Clinton and Bernie Sanders mentality. It appears that his government’s policies have helped bring the USA back to being the most competitive country in the world, regaining the No. 1 spot for the first time since 2008 in an index produced by the World Economic Forum. The strong US stock market is at least one reflection of policy stance. Warner Brothers did a couple of great cartoons explaining how supporting industry and investment works to help us all – very fun clips seen here and  seen here. 

Harper’s comments got me thinking about the pipelines. Canada’s government, as even the most ardent supporter of the current regime cannot deny, completely botched the Kinder Morgan pipeline at an almost unfathomable cost to taxpayers. A fine example of an incompetent government’s involvement, and what can go wrong.

So what about current publicly traded pipelines in Canada? Should one consider investing in them, given government’s who strive to satisfy special interest groups – who in turn might oppose their expansion and involk policies like carbon taxes? Can they grow and profit down the road in such an environment? Will these governments and their policies be dethroned as have others across the world, and will that eventually aid this sector? Let’s look at the three Canadian pipeline stocks from a technical perspective. Remember, the chart reflects all facts that are known at this time on these stocks, and reflects future prospects via the current trend.

 

 

Enbridge

ENB’s chart is a longer timeframe than I typically post. I wanted to illustrate how this (and other) pipelines have transitioned from a bull trend to a sideways trend. This transition began in 2015 (date of last Federal election year….coincidence….?). Of course, oil had peaked the year prior (2014), but pipelines are usually somewhat less volatile than producers-give their nature as a carrier. The stock has been forming a massive right angled triangle. Clear support lies at $35. We own the income fund (ENF) version of this stock in our income platform. The ENB stock shows little sign of growth prospects beyond rallies to the descending top trendline within the triangle. That lies around the mid-30’s if we extrapolate the trendline forward. This stock, and the ENF counterpart (disclosure: we hold that in our ValueTrend Income Platform), is fine for income, but not for growth.

 

Pembina

PPL is more of a balanced pipeline/producer stock. Tts trend has been better than that of ENB noted above. Nonetheless, it hasn’t seen a new high since 2014. A better looking chart than ENB for growth, but there is that old 2014 high at just over $50 that should worry investors.

 

TransCanada

This stock peaked in 2017. The recent move looks dangerous –give the lower low and lower peak on the weekly chart and its failure to break above the 200 day SMA since its peak. I’d avoid it for now.

 

Conclusion

My thoughts on the pipelines are mixed. They pay high yields (all three pay over more than 5% at this time), which can make them candidates for an income orientated portfolio. The risk of ownership lies within the trend. Certainly, if we see a break out of ENB’s long termed support, or a failure by PPL to bust its old highs, or a continued series of lower lows and highs on TRP – we should avoid the trade. None of these stocks offer much encouragement for the growth investor – although PPL could end up becoming a better play if its high is taken out. I’d be inclined to remain income-focused only for these stocks – and be wary of a breakdown.

6 Comments

    • Canadians are apathetic with regards to how our current government operates.

      Reply
  • Great post Keith. Interesting that on a recent visit to family in southern Ontario, I raised the subject of the troubles getting the Trans-Mountain pipeline built. They were virtually unaware of this!! Just shows how uninformed some people are of problems that seriously affect other Canadians and indirectly affect them as well.

    Reply
    • I have found that Canadians in general are really quite oblivious to many things that the current government is doing. They have no idea that the debt and deficit are growing, and dont understand its impact on our future. Eg–even on the provincial level, when former Ontario Wynn created “off book debt” and threw the province credit rating into near-junk, the average citizen is apathetic and ignorant as to that impact on our future. They are unaware of the Federal UN spending while our healthcare system is overbooked, and our own poor suffer, they’ve forgotten the Aga Khan ethics case, the multiple taxpayer funded trips, the nannies, the special privileges to select groups imparted to win votes. They are apathetic towards sending money to foreign countries and gifting private enterprises (corporate bailouts), they don’t understand how the dairy cartel ultimately hurt/ hurts them (now through subsidies). They buy into the BS–eg, just announced carbon tax rebates to families–this is taking money out of your wallet to pay for higher gas, and then giving some of it back-net flat trade you might say—and Canadians will not see through this smoke and mirror show… Ignorance is bliss to most.
      I could go on – and I will in my year end “Rant-blog”–but yes, it is distressing to note the complete lack of understanding by Canadians of what is being done to them, and why it matters. Apathy rules. In contrast, I hang out with alot of US residents on my bike trips, and on average, more of them are informed of their governments policies. As somebody once said – “Americans wouldn’t put up with the #$#%$ that Canadians do”

      Reply
  • Your comments are right on Keith. I have no problem with carbon taxes as long as the U S A has equivalent taxes. Along with all the other disincentives toward business in Ontario in particular, carbon taxes now would be very unfortunate for employment going forward. Give the Liberals credit though for a winning if cynical play, vote for us and we will give you a check for $300.00!!

    Reply

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