Why Investing in Natural Gas Should Pay off for These MLPs

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As America embarks on its ever-evolving national energy solution, natural gas is becoming an increasing part of the equation, thanks to a glut of domestic supply. That means pipeline and storage facility operators such as Enterprise Products Partners (NYSE: EPD  ) , Kinder Morgan Energy Partners (UNKNOWN: KMP.DL  ) , and Energy Transfer Partners (NYSE: ETP  ) stand to benefit. This is due to the fact that these pipeline operators are making huge investments in natural gas, and the potential payoff should mean impressive returns for investors.

Natural gas means plenty of growth left in the pipeline
The U.S. Energy Information Administration noted that proved reserves of natural gas hit a record in 2011, of nearly 350 trillion cubic feet of supply.

In short, this means huge potential for the oil and gas Master Limited Partnerships that are lining up to take advantage of the American shale revolution.

A dividend darling continues to grow
Enterprise Products Partners is shifting heavily into natural gas in preparation, and in total, boasts over 50,000 miles of natural-gas and crude-oil pipelines. In addition, Enterprise Product Partners has immense storage facilities with 190 million barrels of natural-gas liquids, refined products and crude-oil storage capacity.

And, Enterprise Products has several major projects lined up for 2014 to take advantage of the natural gas revolution. Its planned projects involving natural gas include an impressive 435-mile natural-gas pipeline running between Colorado and Texas.

Industry titan at work
Meanwhile, Kinder Morgan operates 75,000 miles of pipelines and 180 terminals, and the company's recent strategic initiatives prove its vision for natural-gas production in the United States.

Kinder Morgan embarked on an impressive spending spree over the last couple of years designed to make a huge push into natural gas. First, the company purchased El Paso Pipeline Partners for $21 billion.At the time, Kinder Morgan CEO Richard Kinder called the deal a 'once in a lifetime opportunity.' And, it's not hard to see why.

Despite the rush into domestic natural-gas production, many promising shale fields lacked the necessary pipeline capacity to transport the gas. This is where Kinder Morgan hopes to reap considerable rewards since El Paso's assets are, for the most part, interstate natural gas pipelines.

To supplement its positioning in natural-gas transportation and storage, Kinder Morgan then purchased natural-gas pipeline operator Copano Energy for $3.2 billion earlier this year. While a much smaller transaction, the integration possibilities presented by Copano were clearly attractive to Kinder Morgan.With Copano now under its belt, Kinder Morgan is well-positioned to pursue development in several key areas, including the Eagle Ford Shale and Barnett Shale in Texas.

A purer-play natural-gas MLP
Whereas Enterprise Products and Kinder Morgan have diversified assets and operations, Energy Transfer Partners operates almost entirely in natural gas. Energy Transfer Partners currently has natural-gas operations that include approximately 47,000 miles of gathering and transportation pipelines, treating and processing assets, and storage facilities.

The company has racked up 46% growth in distributable cash flow during the first six months of the year, and the company is optimistic about its natural-gas projects going forward. These include a new plant in Texas capable of processing 200 million cubic feet per day that opened in the second quarter of this year.

Why these companies stand to benefit
Natural gas demand and usage are on the rise in the United States, which means the companies that have taken aggressive action now are in prime position to profit.

Consider that between October 2011 and September 2012, natural gas comprised 30% of the nation's electricity.  Coal made up 37% of the total.  This stands in stark contrast to a decade prior, when natural gas accounted for just 18% of U.S. electricity.

And, finally, natural gas prices seem to be reacting as you'd expect.  Recently, natural gas prices touched a five-week high at the New York Mercantile Exchange. If the combination of rising prices and increasing demand are sustained, natural gas is poised to become a permanent part of our national energy mix. These companies that have stepped in front of the trend will likely see their efforts rewarded.

Pumping distributions out to shareholders
At current prices, these three stocks provide their investors with hefty yields. Enterprise Products and Kinder Morgan yield 4.5%, and 6.4%, respectively. Energy Transfer Partners does even better for its investors, with a nearly 7% distribution. And, due to their impressive growth strategies, particularly toward natural gas, each of these MLP's should be able to increase their distributions for many years.

If you're a strong believer in the increasing role natural gas is to play in our national energy solution, Energy Transfer Partners should be the focus of your research.  If, on the other hand, you'd prefer more diversified oil and gas MLPs, Kinder Morgan and Enterprise Products Partners should be given preference.  But, as a whole, natural gas is set to play a larger role in our domestic energy mix, which investors would be wise to take into consideration.

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Read/Post Comments (2) | Recommend This Article (13)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On September 06, 2013, at 7:31 PM, LAVol wrote:

    I concur that KMP will benefit for several years from the natural gas shale boom. What we will see in the next few years is KMP benefiting from the Marcellus play. Northeast customers with long term transportation agreements will continue to pay their reservation charges for pipeline capacity from Texas and the Gulf Coast but they'll buy cheaper gas from the Marcellus in PA. KMP will be free to transport incremental volumes from the Marcellus to the gulf coast, either physically or by "displacement" (use gulf coast gas scheduled to the NE in place of moving gas from the Marcellus to the gulf coast and visa versa). KMP will collect for transportation in both directions on the same pipe, effectively doubling that pipeline capacity, which should translate to a windfall for shareholders. My contacts in the natural gas pipeline business confirm that Marcellus gas will be priced to be competitive with gulf coast gas because the supply will be much greater than northeast demand. BUT, as the long term transportation agreements expire, KMP will be at risk on those agreements and will probably have to reduce rates on those agreements.

    --retired natural gas exec. and consultant

  • Report this Comment On September 06, 2013, at 9:47 PM, 2CestMoi wrote:

    All I have seen so far of this whole thing is miles and miles of destroyed forests, the road at the bottom of my driveway looking like there's a geyser under it, and had to spend HOURS calming my daughter's already old and sick dog down from the explosions and noise from the trucks. SOMETHING good better come out of them disrupting the lives and destroying the beauty of NE PA. I'm feeling WV all over again...

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