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3 gas pipeline companies to benefit from expected supply shortage

The concern over gas supply to the eastern states is rising due to the expectation that prices may double or even triple over the mid-term. Businesses are already starting to get into contracts with suppliers to lock in prices and supply amounts.

For example, Orica (ASX: ORI) this month announced that a natural gas delivery deal was struck with Esso Australia Resources and a subsidiary of BHP Billiton (ASX: BHP) for a three-year gas arrangement starting in 2017 for its New South Wales manufacturing facility.

Similarly, other discussions for gas supply are also happening for its Queensland facility, and back in July it announced it would be working with Strike Energy (ASX: STX) to help the energy company evaluate and commercialise a prospective gas source in the Cooper Basin region.

Even though more natural gas is planned to be developed, a large amount of it will be headed for export where it can be sold at a higher price. Also, when importers lock in supply delivery, it’s usually for long periods of time, so that volume will have to be shipped even if businesses could benefit from using it domestically. That is why market experts are predicting great increases in price.

Similar to Warren Buffett, chairman of Berkshire Hathaway (NYSE: BRK-A, BRK-B), and his fondness for train companies, I like pipeline companies. They deliver the goods, there’s usually not much competition in a particular region, and apart from regular maintenance you don’t have to put a great amount of capital into them once they’re constructed.

What are some of the companies are operating pipelines between the gas producing areas and cities and export terminals?

SP Ausnet (ASX: SPN) operates a transmission pipeline system that supplies customers in central and western Victoria. It has over 589,000 consumer connections, and in 2013 raised its net profit after tax by 9.4% from $255 million to $279.1 million.

APA Group (ASX: APA) has interests in 14,000km of transmission pipeline that transports more than half of the natural gas Australia uses each year. It also owns gas distribution networks in QLD and NSW, and the Victorian Transmission System in VIC. It also has investments in other pipeline-related companies.

In 2013, NPAT before abnormals grew from $140.3 million to $175.9 million, up 25%, for the tenth year in a row.

Envestra (ASX: ENV) delivers gas through its own gas distribution networks and transmission pipelines to various states, with the gas networks operating mainly as regulated monopolies in key population centres in VIC, South Australia and QLD, in addition to smaller centres in NSW and the Northern Territory.

It also had a really good year in 2013, with NPAT before abnormals up about 45.8% from $73.9 million to $107.8 million.

Foolish takeaway

Pipelines may sound boring to some, but in investing, the joy that investors get is based on the rising earnings of the stocks they own. If companies can enjoy steady, growing business in an industry that is difficult for competitors to enter or operate in, all the better. The shareholders’ thrill comes later when their portfolio returns rise.

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Motley Fool contributor Darryl Daté-Shappard does not own shares in any company mentioned

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