These 3 Pipelines Are a Great Way to Build Income

Investing in pipeline MLPs is a great way to build income and be part of the domestic energy revolution in a relatively safe way. Pipelines provide good sources of income from fixed assets with long-term cash flow visibility. They're kind of like utilities, except pipelines will grow income and distributions alongside growth in energy production in the US. 

This article will focus on what I think are the three most compelling pipeline stories in North America. One is primarily a natural gas play, the other an oil transporter, and the third does all of the above and then some. 

Biggest player in the biggest shale
While the Eagle Ford and Bakken shales get the most attention, the most prolific shale in the US, by barrels of oil equivalent, is actually the  Marcellus. Located in Pennsylvania and upstate New York, the Marcellus' production is almost entirely natural gas, but has the largest shale gas reserves at the lowest cost base. The largest midstream name here is easily MarkWest Energy (NYSE: MWE  ) .  

MarkWest also has the advantage of being right next door to the nascent, liquids-rich Utica shale. Between steady, production growth in the Marcellus and the rigs breaking new ground in the Utica, MarkWest has its hands full in building out new gas processing capacity. Consider this: The partnership is set to more than double its gas processing capacity from 1.6 billion to 3.3 billion cubic feet per day by the end of 2014. 

Displacing oil imports
If MarkWest is the midstream gas pure-play to watch, Plains All American Pipeline (NYSE: PAA  ) is its oily counterpart. Well, Plains isn't 100% oil, but it is probably the most oil-heavy pipeline partnership. Plains has a definitive growth story, as well. Through 2016, Plains estimates that North America will increase oil production by 3.4 million barrels per day, which will displace all imports of light sweet crude and cut overall imports to just over half of 2009 levels. 

Plains is also a growth story, albeit not at the same pace as MarkWest: The partnership intends to grow distributions by 9%-10% this year. Given the ascension of crude production in the US, I believe this trend will sustain for the long run. In the meantime, Plains is building a pipeline from the Permian to Corpus Christi, an Eagle Ford-Corpus pipeline, a Bakken pipeline expansion, new storage projects in Oklahoma and terminals in both Louisiana and Virginia. 

All of the above
Plains and MarkWest each specialize in the transport and storage of one commodity. Not so for the next name, Kinder Morgan Energy Partners (NYSE: KMP  ) . Kinder Morgan handles both oil and gas, as well as natural gas liquids and a host of other things such as ethanol, CO2 (for advanced oil and gas recovery methods), and more. In fact, Kinder Morgan is the biggest midstream company in North America, with a comprehensive map of assets that take various hydrocarbon commodities to a multitude of places.

While it would be tedious to list all of Kinder Morgan's assets, its strongest positions are the following: oil pipelines in the Eagle Ford, transportation to and storage of liquids on the Texas-Louisiana gulf coast, CO2 transport and production through the Permian, a vast natural gas pipeline system in the west, the only Pacific export pipeline in Canada, and a natural gas pipeline into Mexico. Kinder Morgan is truly a broad bet on energy activity in North America. 

Management expects 7% distribution growth for KMP units, which is consistent with growth over the past three years or so. With a 5-year backlog of projects, there is plenty of growth ahead. 

Only Kinder Morgan is on sale

Source: YCharts

With high income from fixed, long-lived assets, most pipeline MLPs are valued by distribution yield.  As we can see above, MarkWest's dividend has been steadily declining over the last twelve months. Plains' has been low for awhile. Both are now hovering around with a yield in the mid 4% range.

That's not bad, but Kinder Morgan's sits near its highs for the year. Part of the reason for the higher yield is because it pays virtually all of its cash back to unitholders while MarkWest and Plains both like to have a cushion for error. Still, units of Kinder Morgan have been held down by attacks from an infamous short-selling hedge fund. And while I believe CEO Rich Kinder did a good job of publicly refuting most of said hedge fund's accusations, KMP units remain beaten down. We don't get many chances to buy KMP with a yield in the high 6s, and so I believe now is a good time to add some units.

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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 October 06, 2013, at 8:35 PM, DivyInvstr wrote:

    Seriously, if you don't know the difference between dividend (really distributions for MLPs) levels and yield levels perhaps writing investment articles is not for you.

    The dividends for both MWE and PAA have not declined but are higher over the past year, and substantial dividend growth is expected to continue into the future for both companies as well.

    The yield has declined for both companies because prices for each MLP has increased at a faster rate than the dividend increases because the market recognizes the increasingly positive growth path for each MLP.

  • Report this Comment On October 07, 2013, at 12:44 AM, bizzgroup wrote:

    I think Obama has played it smart. Not approving any pipelines until the last minute. He is going to use its approval as a debt ceiling bargaining chip.

    I am for the pipeline its good for America's oil independence. I cannot imagine why he has not approved it so far.

  • Report this Comment On October 07, 2013, at 10:24 AM, mr091468 wrote:

    bizzgroup, because he's a socialist who hate Oil and Gas and he's out to wreck the coal industry and the lives of thousands of coal industry workers.

  • Report this Comment On October 07, 2013, at 12:01 PM, Heidikitty wrote:

    I am torn between KMI and KMP long term

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