3 Pipeline MLPs You Should Consider
Damon is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
The pipeline MLP industry has gained increased recognition of late along with rising crude oil prices. Operators of transport systems have always been good investments for those seeking high yields. At times, they may entice seekers of price appreciation, as well.
Due to the fact that they are some of the best-yielding companies, MLPs are typically priced at a premium. It is likely that this is also because of the long-term prospects of the industry. Specifically, the sector outlook is favorable for the next several years, as energy production in the U.S. increases.
Here's an overview of several of the major pipeline MLPs that also happen to be some of my favorites.
1. Enbridge Energy Partners (NYSE: EEP): Sizable and expanding Canadian partnership
This $10.3 billion market capitalization limited partnership operates a liquid petroleum and crude oil pipeline that runs from Western Canada, through the U.S. Great Lakes region, and into Eastern Canada. It also has a substantial natural gas gathering and transportation lines business.
Enbridge is focused partly on expanding its core asset platforms, as well as developing new avenues of growth. To this end, it plans to spend $3.1 billion this year on system enhancements and other projects associated with its natural gas and liquid systems. It will also pursue acquisitions that ought to be cash flow positive.
As the company invests in operations, earnings are apt to be subdued as compared to last year, depending on commodity prices. Looking to next year, I expect Enbridge to realize benefits, and see an accelerated upturn in profits.
In particular, Enbridge's "Eastern Access" projects, that ought to cost about $1.4 billion, will provide the company enhanced exposure to Upper Midwestern U.S., Quebec, and Ontario for light crude refining.
Enbridge partnership units are a worthwhile purchase for price upside and their 6.6% distribution yield.
2. Kinder Morgan Energy Partners (NYSE: KMP): The consolidating market share giant
Kinder Morgan, one of the largest pipeline MLPs, is also steadily growing. Its anticipated capital expansion program outlays are $2.9 billion for 2013. Cash will be utilized for small acquisitions and joint venture contributions that should drive earnings growth this year.
The company's most notable acquisition was the May 2012 buyout of El Paso, largely composed of a pipeline company. Plus, in 2011, it bought out the Seaway Crude Pipeline System, running from Cushing, Oklahoma, to Freeport, Texas. Joint ventures currently existing include its Eagle Ford Gathering LLC, operating in South Texas.
Most of the company's pipelines, such as Cochin, supplying natural gas liquids, and Tennessee Gas Pipeline, transporting natural gas, are growing their revenue and operating income. Thus, the capacity additions should allow for better results going forward.
I like Kinder Morgan units for their price appreciation potential and yield, as the company is poised to benefit from its massive size and scope. The units yield about 5.9% at their recent price quotation, in keeping with the majority of its peers that offer yields of around 6%.
3. Spectra Energy Partners (NYSE: SEP): Also looking to build its asset base
Spectra states as its primary business objectives the pursuit of acquisitions and the development of organic assets. The company targets buyouts in its existing geography served, in addition to new regions; for instance, it expanded into the Northeast U.S. through an October 2012 deal.
Near-term earnings comparisons at Spectra could suffer from low natural gas prices, and the decision by producers to delay production in the Fayettville Shale. In fact, earnings might well decline this year on a year-over-year basis.
By next year, Spectra should realize a rebound in operating profits from its U.S. Transmission unit that provides the bulk of its revenue. Its Distribution unit ought to fare well, also. Spectra Energy Partners is 61% owned by Spectra Energy.
For the long-term, I think Spectra is taking the correct approach in building its asset base, and is apt to be a generator of improved results. Accordingly, I think the units are a good holding for long-term buy-to-hold accounts. In the meantime, investors may want to capitalize on their distribution, currently a 4.4% yield.
Finding the best pipeline MLP should be partly a function of their business strategy, particularly if they are in expansion mode. These companies are all aiming to expand their operations by way of acquisitions, and/or development of existing transportation and storage assets. Of the three, I like units of Kinder Morgan, in light of its solid market position and the likelihood of recent deals supporting the bottom line.
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