Pipeline stocks looked duller than drying paint when the broader stock market was rallying on good times ahead earlier this year. Now that those good times have been pushed aside by fears of another recession and the head-splitting complexities of the European debt crisis, dull is looking good.
Broad market indexes slumped by double digits during the third quarter and Canadian energy stocks were hit by far the hardest within the S&P/TSX composite index, falling about 19 per cent.
Apparently no one told the pipelines about the shift in sentiment, however: TransCanada Corp. (full disclosure: I own this stock) rose 11 per cent in the third quarter and Pembina Pipeline Corp. gained nearly 19 per cent. Both stocks are flirting with record highs.
Owning the pipes through which energy sources are pumped might not be a terribly exciting way to participate in the energy market, but gyrating crude oil prices mean that it is a lot more stable than finding and producing that energy.
During the last financial crisis and recession, which sent crude oil tumbling below $40 (U.S.) a barrel in late 2008 and early 2009 from about $145 just six months earlier, energy stocks were savaged. The sharp drop meant that the price of oil no longer met the cost of production, and investors fled.
But pipelines, with their fixed costs and long-term contracts, cruised through the turbulence, with earnings dipping only slightly. Perhaps more importantly, these companies remained wildly profitable, raised their dividends and attracted safety-conscious investors.
Of course, nimble investors might see the current volatility as an ideal time to shift out of safety and back into some of the more beaten-up names in the oil patch (Suncor Energy Inc., for example, plunged 29 per cent in the third quarter).
The thing about safety and stability, though, is that you never know when you’ll need them. No doubt, crude oil producers will bounce higher when oil prices get their groove back. But they could also fall more if the current slump persists. The timing is tough.
But pipelines, with their strong dividends and steady earnings, offer an ideal vantage point from which to view the turbulence – and make a decent return regardless of which way the economy turns.