1 Midstream Stock That's Ahead of the Game

You've heard it all before, savvy energy investors. Horizontal drilling and hydraulic fracturing have unlocked the secrets of America's shales, and we now have more natural gas than we know what to do with.

U.S. natural gas production has increased from 1.45 trillion cubic feet per month in 1986 to 2.53 TCF per month in 2012. Nationwide, the booming U.S. shale plays are estimated to hold 482 TCF of recoverable gas. Texas alone has 80.4 TCF in natural-gas reserves.

In fact, according to the Energy Information Administration, 2010's proved reserves of natural gas increased by the highest amounts ever recorded. The agency reported an addition of 33.8 TCF of wet gas, which includes natural-gas liquids.

Forget the producers
Despite all that gas, it's hard to think about buying into a natural-gas producer when the price of natural gas -- the very thing these companies depend upon to make money -- is so low right now. Instead, let's take a look at the companies that transport natural gas all across the country. They also gather it, store it, process it, and separate all the different natural-gas liquids. In short, they do everything but produce the stuff. They are the midstream industry.

The energy boom is producing so much gas that there simply isn't enough midstream infrastructure to handle it all. We need more pipelines, more fractionation facilities -- more everything, really. Natural-gas production volume is increasing all across the country, and when volume goes up, midstream revenue goes up, too.

Plains All American Pipeline (NYSE: PAA  ) is one of midstream's potential winners. The master limited partnership has assets that range from the obvious pipelines, storage, and processing facilities to fleets of trucks, railcars, and barges. With more than $17.1 billion in assets spanning some of the most lucrative North American oil and gas plays, Plains is worthy of investor consideration.

Timing is everything
When most of the producers in the natural-gas industry decided it would be more cost-effective to move out of dry-gas production and focus on natural-gas liquids, Plains was working to close a $1.7 billion deal with BP (NYSE: BP  ) . The partnership picked up all of the British company's NGL assets in Canada, which included 2,600 miles of pipeline, gas-extracting plants, and storage facilities. As North American liquids production continues to grow, Plains is in an excellent position to take advantage.

Plains' long-term growth strategy focuses on "bolt-on" acquisitions in core markets where it already has a presence, as well as strategic purchases in new areas. The company has spent roughly $3 billion on 10 acquisitions since the beginning of 2011.

Risks to be aware of
The master limited partnership structure doesn't give Plains much breathing room when it comes to saving up cash for its acquisitions, forcing it to rely on outside funding for the purchases. This could limit its ability to grow if it becomes difficult to access credit, but this has yet to pose a problem.

Additionally, after an oil spill in Alberta, Plains may find itself dealing with the same problem midstream peers Enbridge (NYSE: ENB  ) and TransCanada (NYSE: TRP  ) are facing: vehement public opposition to any and all new pipeline projects.

The one advantage Plains has in this situation is that the diversity of its asset base allows the company to grow in other ways. For example, two new rail facilities, with combined capacity of 200,000 barrels per day, are expected to come online by the end of 2013. However, the increasingly common "not in my backyard" attitude is an obstacle that can no longer be ignored.

Gift that keeps on giving
Plains expects to increase its unit distributions by 8% to 9% this year compared to last, and it's currently on track to do so. Right now, Plains' yield stands at about 5% for an annualized distribution of $4.26 per unit.

Distributable cash flow reached $390 million in the most recent quarter, providing 1.65 times distribution coverage. With solid numbers like that, investors can be optimistic about continued distribution growth.

Foolish takeaway
The Interstate Natural Gas Association of America, or INGAA, estimates that over the next 25 years we will need a whopping $200 billion of midstream infrastructure development to handle growing gas supplies. The system needs to accommodate the additional capacity of 43 billion cubic feet of natural gas per day that's expected to come online by 2035.

Many of these new projects will not be built without customer agreements in place, which means guaranteed, reliable income for midstream operators. And that's something every investor loves to hear.

With the swelling of the global middle class, energy consumption will skyrocket over the next few decades, and long-term investors want exposure to this space now. We've picked one incredible natural-gas company that presents a rare "double-play" investment opportunity today. We're calling it "The One Energy Stock You Must Own Before 2014," and you can uncover it today, totally free, in our special free report. Click here to read more.

Fool contributor Aimee Duffy has no positions in the stocks mentioned above. The Motley Fool has no positions in the stocks mentioned above. 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.


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