Why Kinder Morgan Is a Premier Midstream MLP

Master limited partnerships, or MLPs, that operate in the midstream process of storing and transporting oil and natural gas are highly favored by investors. That's for a variety of reasons, one of which is that their businesses are inherently less risky than other oil and gas operations.

Midstream MLPs operate much like toll roads -- they collect fees based on the volumes of products they store and transport, and therefore aren't vulnerable to sudden swings in commodity prices. In addition, MLPs are widely coveted due to their extremely high yields.

Among the midstream MLP universe, investors can choose from several high-quality businesses. Enterprise Products Partners (NYSE: EPD  ) and Plains All American Pipeline (NYSE: PAA  ) are two of the most highly regarded within the space. While both are great companies that reward their investors with hefty yields, one midstream MLP is better than the rest. That's Kinder Morgan Energy Partners (NYSE: KMP  ) , which has some distinct advantages you should know about.

Hefty profits in the pipeline
To be sure, each of these three companies is seeing solid results so far this year thanks to the boom in domestic energy production. Demand for storage and transportation of oil and gas continues to rise, which bodes well for 2014 and beyond. That's good news for both Enterprise Products Partners and Plains All American.

Enterprise Products' underlying business is strong, indicated by the fact that its liquids pipelines hit record volumes in the third quarter. In all, volumes transported by the company's natural gas liquids, crude oil, refined products, and petrochemicals pipelines increased by 845,000 barrels per day, or 20%, to a new record.

However, one potential red flag for investors is that Enterprise Products Partners' distributable cash flow, a non-GAAP earnings equivalent, is actually down 16% through the first nine months of the year. This is due almost entirely to the company's interest rate hedges, as well as lower proceeds from asset sales. If you exclude these items, the results show a more favorable 9% increase in adjusted EBITDA. Nevertheless, this represents something to watch.

Meanwhile, Plains All American's distributable cash flow is up 13% over the first three quarters of 2013, and next year promises to be strong as well. Management guidance calls for a 20% increase in its core fee-based activities, which should be complemented by recently completed projects. Plains All American is in the process of a multi-billion dollar portfolio of organic growth investments, which leads management to predict a 10% distribution growth target next year.

By comparison, Kinder Morgan grew distributable cash flow by 22% through the first nine months of the year, to more than $1.6 billion. Going forward, management takes a very optimistic view of the company's future prospects. According to Chairman and CEO Richard Kinder, "We continue to see robust growth opportunities across all of our business segments." This has a lot to do with the natural gas boom. Kinder Morgan's biggest segment is its natural gas pipelines business, which saw earnings more than double through the first nine months of 2013.

Kinder Morgan's distribution stands apart
Many midstream MLPs, including Enterprise Products Partners and Plains All American, have seen their unit prices rise significantly over the past few years. Gains have been so impressive that their distribution growth couldn't keep up, and as a result, their yields are now below Kinder Morgan's. Enterprise Products Partners and Plains All American both yield approximately 4.5%, which to be fair, is still significantly above the yield on the broader stock market.

That being said, Kinder Morgan hasn't seen its units rise to the same extent as its peers. While that's been disappointing for existing unit-holders, it means potential investors are getting the company with a significantly higher yield. Kinder Morgan's $5.40 per-unit distribution presents a compelling 6.6% dividend yield. As a result, while Enterprise Product Partners and Plains All American are seeing solid underlying business trends, Kinder Morgan stands apart.

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