Why Make the Less Sexy Bet on Energy?
Marshall is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
Sure transportation and storage doesn't sound as sexy as exploring, extracting and refining oil and gas, but it can still make investors money. The major oil and gas transportation companies also provide solid income.
What's more, for investors looking to avoid the confusion and increased headache related to tax filings (i.e. receiving K-1s) that comes with investing in limited partnerships, there are energy transport corporations available. The top picks in the industry include Williams Companies (NYSE: WMB), TransCanada (NYSE: TRP), Kinder Morgan (NYSE: KMI) and ONEOK (NYSE: OKE)
The oil and gas storage and transportation industry is fundamental to energy infrastructure. Industry tailwinds include the Energy Information Administration (EIA)'s expectations that U.S. liquid fuels consumption will increase 0.4% in 2013 after having declined 2.1% in 2012. The EIA also expects natural gas consumption to rise 0.7% in 2013.
One of my favorite picks in the industry is Williams Companies, which pays a 4.3% dividend yield. Williams is a key player in the energy infrastructure space, with operations spanning from the Gulf of Mexico to the Canadian oil sands.
In a basic sense, Williams provides natural gas gathering, processing, storage and marketing of natural gas. Its biggest earnings contributor is its ownership interests in Williams Energy, where it owns the general-partner interest and a 70% limited-partner interest. Williams spunoff WPX Energy in early 2012 and is now a pure-play mid-stream operator with assets from the Northwest U.S. to the Gulf of Mexico.
Source: Williams Partners Annual Report
Williams also has a $20 billion capital expenditure plan to expand its footprint through 2017. Part of the expansion plan includes its March partnership with Boardwalk Pipeline Partners for the Bluegrass Pipeline. This pipeline would connect the Ohio, West Virginia and Pennsylvania region to the Gulf Coast with a 200,000 barrels per day of natural gas liquids capacity.
The midstream market
TransCanada (NYSE:TRP) is another North American energy infrastructure company focused on natural gas pipelines, oil pipelines and energy, while also paying a 4% dividend yield. Natural gas pipelines account for some 50% of revenues, while oil pipelines is 10% and energy 40%.
After the U.S. State Department rejected its application for Keystone, TransCanada began working with the state of Nebraska to reroute its pipeline to get approval. If approved during the fall of 2013, TransCanada expects the pipeline to be in service by mid-2015.
Sure TransCanada has taken a lot of heat over pollution and environmental concerns related to the pipeline, but the company is also active in promoting less-carbon intensive solutions. TransCanada recently completed the acquisition of the first of nine Ontario solar power facilities from Canadian Solar. The remaining eight projects are expected to be in service by the end of 2014.
It might surprise investors to learn that the potential builder of the Keystone pipeline gets "one-third of the power [it] provides to North American consumers today comes from carbon-free energy sources," as noted by TransCanada CEO. This is, in part, thanks to the $5 billion the company has invested to date in emission-less energy sources, which includes the largest wind farm in New England and its thirteen hydro power facilities in New Hampshire, Massachusetts and Vermont.
Kinder Morgan (NYSE:KMI) manages a diversified portfolio of transportation and storage assets, while also paying a 4% dividend yield. Kinder is one of the largest midstream energy companies, owning the general partner interest in Kinder Morgan Energy Partners and El Paso Pipeline Partners. Kinder Morgan Energy Partners' natural gas segment is expected to post a double-digit growth in earnings in 2012 thanks to its El Paso acquisition.
In early 2012, Kinder Morgan completed its El Paso Corporation acquisition. This makes the company as one of the largest interstate natural gas pipeline operators in the country. Its assets span across many major resource plays, including the Barnett, Haynesville, Utica, Eagle Ford and Marcellus shales. It can bring production from all these places to market efficiently.
Kinder's earnings break down as follows, nearly 18% is attributed to the products pipeline, 34% natural gas pipelines, 26% CO2 pipelines and 16% for the terminals segment. Kinder Morgan intends to invest about $3 billion in expansion and acquisitions in 2013, helping capitalizing on the key areas of the Eagle Ford and Haynesville shales.
ONEOK is an Oklahoma-based natural gas utility paying a 3.6% dividend yield. ONEOK gets over 80% of operating income from ONEOK Partners, while its other key revenue generator is its distribution segment, accounting for nearly 20% of operating income. ONEOK gathers, processes, stores and transports natural gas. ONEOK has plans to spend $4.5 billion through 2015 on growth projects, and like Williams plans grow to its dividend payment nicely over the near-term, by 65% through 2015.
Hedge fund trade
Going into 2Q, Williams had 41 hedge funds long the stock. Meanwhile, Kinder Morgan had an impressive 54 hedge funds long the stock, with billionaire Stephan Mandel's Lone Pine Capital having the top position, worth $534 million.
TransCanada had only 12 hedge funds long the stock, but this was a 140% increase from the previous quarter. Worth noting is that billionaire Jim Simons of Renaissance Technologies had the largest position among major hedge funds, but worth only $28 million.
Williams has the best dividend yield...
And the company has some of the best prospects, with a key position in the Gulf of Mexico area. WIlliams already has a strong presence in the Gulf Coast, as well as assets in the Northwest U.S., thus, the Bluegrass Pipeline will allow the company to tap the fast growing resource plays in Ohio and Pennsylvania.
Meanwhile, it would not be a bad idea to check out Kinder Morgan given its size and scope, while TransCanada is also a solid investment opportunity if its Keystone XL pipeline is approved. TransCanada generated some $8 billion in revenue last fiscal year, but the Keystone pipeline has the potential to add $2 billion to $3 billion annually. Otherwise, TransCanada appears to be a bit expensive -- trading at 24 times earnings compared to its 5-year average P/E of 19 times, and 3.8 times sales versus the 5-year average P/S of 3.1 times.
Marshall Hargrave has no position in any stocks mentioned. The Motley Fool recommends Kinder Morgan and ONEOK. The Motley Fool owns shares of Kinder Morgan. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!