The new thing in energy is old pipes

There’s gold in them than holes. That’s my stab at an elevator pitch for oilfield-services veteran Andrew Gould’s latest venture. The former Schlumberger Ltd. CEO’s investment vehicle, Sentinel Energy Services Inc., announced it will buy Strike LLC, which specialises in maintaining and repairing pipelines. Once the $854 million deal closes, Strike will become a public company.
It is interesting that Gould, having no doubt scanned a wide range of potential targets across the services sector, settled on this relatively mundane corner of it. He isn’t the only one, either.
Earlier this month, First Reserve, a large private equity firm specialising in energy, completed acquisition of Dresser Natural Gas Solutions from Baker Hughes, a GE Co. Dresser NGS makes natural-gas meters and pipeline-repair equipment.
The US oil and gas business is one of the oldest in the world, and it has the pipes to show for it. More than half of the crude oil and refined product petroleum pipeline network, as well as the natural-gas transmission network, is more than 50 years old, according to data from the Pipeline and Hazardous Materials Safety Administration. The much longer natural-gas distribution network is a little more sprightly; even so, almost half of it predates the Reagan administration.
Old pipes aren’t necessarily accidents waiting to happen. But, like any aged piece of infrastructure, they can be if their upkeep slips. And in this business, that can carry big costs in terms of cash, reputation, the environment and even lives.
For example, America’s older crude oil and refined product pipelines account for a disproportionate share of leaks. In particular, while the Sixties may have been great for many other things, welding wasn’t one of them.
So there’s a deep inventory of energy infrastructure to fix, replace, and monitor. This helps to distance this business somewhat from the commodity cycle. The gas distribution segment of the market is especially noteworthy. Upgrades, including such things as smart meters, get added to gas utilities’ regulated rate base, providing steady, long-term investment and revenue opportunities. This has made these networks very desirable for electricity providers facing stagnant power demand.
When Strike makes its stock market debut, it will offer a combination of the relatively steady maintenance business, as well as growth potential from new infrastructure being built to ease the bottlenecks around the Permian shale basin. In that way, it may attract investors who once owned master limited partnerships for a similar sort of exposure.
It should also carry scarcity value. One of the reasons private equity likes the sector is that many of these businesses fly under the radar as privately owned firms or divisions buried within larger companies. There are few pure-play companies of any scale in which to invest.
The quiet roll-up of the sector may force a reappraisal of such stocks. As any plumber will tell you, fixing pipes may not be the nicest job in the world, but it pays pretty well.

Liam Denning is a Bloomberg Opinion columnist covering energy, mining and commodities
. He previously was editor of the Wall Street Journal’s Heard on the Street column and wrote for the Financial Times’ Lex column. He was also an investment banker

The quiet roll-up of the sector may force a reappraisal of such stocks. As any plumber will tell you, fixing pipes may not be the nicest job in the world, but it pays pretty well.

—Bloomberg

Liam Denning is a Bloomberg Opinion columnist covering energy, mining and commodities. He previously was editor of the Wall Street Journal’s Heard on the Street column and wrote for the Financial Times’ Lex column. He was also an investment banker