The Basics of Midstream Investing

 

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Along those lines, over the next few days I'll take a look at a few of the most popular midstream stocks on the market right now. But first, it's important to understand a few of the ins and outs of the industry, and what it is about midstream that makes it such a compelling idea for investors today.

What is midstream?
Midstream in the oil and gas industry describes the middle steps in energy development. Midstream companies are responsible for transporting and processing oil and gas. These companies own and operate everything from pipelines and gathering systems, to railroad terminals, to storage facilities, to complicated processing and fractionation centers that separate natural gas and natural gas liquids.

Without the midstream industry, our energy would be trapped at its source.

Grow, grow, grow
When energy production grows, midstream grows right along with it. And right now, Fools, it's boom time. The explosive growth of North American energy production is driving the full-throttle expansion of pipelines and processing centers across the U.S. and Canada. Every time you read about how much oil and natural gas the U.S. is producing right now, realize that all that energy needs to be gathered, processed, stored, and transported to refineries and other consumers.

Here are a few quick stats about the growth of domestic energy and how it relates to midstream:

  • Energy consultancy IHS Cera estimates that tight oil production in the U.S. will grow from 900,000 barrels per day this year to 2.9 million bpd by 2020.
  • The energy industry expects to spend $130 billion to $210 billion expanding natural gas infrastructure over the next 20 years.
  • Despite rock-bottom prices for U.S. natural gas, production in the Marcellus Shale through the first six months of this year was more than double what it was last year.
  • Consultants at Bentek Energy estimate there are more than 1,000 wells drilled in the Marcellus Shale waiting for pipelines to be built before they begin producing.
  • Bentek forecasts a 78% increase in production over the next three years as midstream infrastructure catches up with the backlog of wells.

Long story short, volumes across midstream systems are increasing at breakneck speeds. And as we'll see in a minute, volume is the key to this industry.

The midstream advantage
The midstream industry has a leg up on other energy stocks, even the booming exploration and production companies. The up and down volatile nature of commodity prices can have a little bit of an impact on midstream revenues and share performance, but it isn't anywhere close to the impact it has on E&Ps. Most midstream outfits operate a business model based as much on fee-based contracts as possible, which means that unlike with our energy producers, it doesn't matter to midstream companies if the price of oil and gas falls to $1 or rises to $100.

Let's drive that reality home with a graph:

BP Chart

BP data by YCharts

Here we have the price performance of BP (NYSE: BP  ) , Anadarko Petroleum (NYSE: APC  ) , Plains All American Pipeline (NYSE: PAA  ) , and Enterprise Products Partners (NYSE: EPD  ) compared with the West Texas Intermediate and Brent spot prices year-to-date. The oil major and the independent E&P more or less track the performance of oil prices, while our midstream companies stay above the fray.

Instead, it is volume that matters to the midstream industry. The more oil and gas running through pipelines, the more money these companies make. And as I mentioned, volumes are rising to all-time highs and will continue to rise.

Foolish takeaway
The midstream industry presents a tremendous opportunity for investors for the near future. Pipelines will be built and filled immediately to support the energy production in plays like the Marcellus and Utica shales, the Eagle Ford, and the Bakken. Aside from the compelling growth story, there are other advantages to midstream stocks that investors can't afford to ignore, like high yields and reliable dividend histories.

Over the next few days I'll take a close look at three midstream companies worthy of consideration for your portfolio: Kinder Morgan, Enterprise Products Partners, and Plains All American Pipeline.

Stay tuned to the Fool all month for other informative articles covering a wide range of investing topics. On Sept. 25, we're taking a day to celebrate the art of investing and we encourage your participation. Take a look at InvestBetterDay.com now and get started on the path to personal prosperity.

 Fool contributor Aimee Duffy holds no position in any company mentioned. Check out her holdings and a short bio. If you have the energy, check out what she's keeping an eye on by following her on Twitter, where she goes by @TMFDuffy.

 Motley Fool newsletter services have recommended buying shares of Enterprise Products Partners and Kinder Morgan. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. Try any of our Foolish newsletter services free for 30 days. The Motley Fool has a disclosure policy.


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