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Stock Analyst Update

ESG Implications for the Midstream Oil and Gas Industry

Cheniere and Plains All American Pipeline rank favorably on sustainabilty issues and are attractively priced.

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Investors are increasingly paying attention to environmental, social, and governance, or ESG, factors, and for midstream companies, environmental concerns are paramount. Pipeline companies are "enablers" that encourage downstream consumption of fossil fuels, making them partially accountable for the greenhouse gas emissions that follow. Most midstream firms also emit waste gasses directly, and the regular occurrence of pipeline spills creates a negative buzz around the industry, inviting further ESG scrutiny.

The direct financial burden associated with these issues is generally modest, as pipeline spill costs account for only a sliver of industry spending. If increased regulatory pressure eventually leads to a carbon tax, we would not expect major valuation changes as firms would pass most of these costs to end consumers. However, the resulting reputational damage threatens relationships with stakeholders on pipeline projects, including local communities, indigenous populations, and government regulators. This often leads to lengthy project delays and increased construction costs, and these can be meaningful.

Our top picks are Cheniere (CQP) and Plains All American Pipeline (PAA), which rank favorably on ESG issues and are attractively priced. Enbridge (ENB) also looks undervalued and should see concerns start to recede because of the emergence of lower-emission solvent-assisted technologies in the oil sands. Energy Transfer (ET) is one of the cheapest midstream firms we cover, but that could be related to its relatively high exposure to ESG-related factors.

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Stephen Ellis does not own shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.

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