3 Pipelines That Offer Value and Growth

Like many energy stocks, pipelines have taken a beating lately, drifting downward on concerns of oil supply overcapacity. To the more casual observer this may seem strange. After all, most pipelines don't have direct exposure to commodity prices.

However, with the way things are going now, pipelines are often lumped in with upstream energy companies because both are sometimes traded within similar exchange-traded funds, or ETFs. Therefore, when the big producers go down, they sometimes take the big pipelines along with them. When we add the pressure on high-yield stocks from rising interest rates, it's not much of a surprise that pipelines are down so much.

But let's look at the bigger picture. If pipelines can grow earnings and distributions by the mid single-digits, are they really the same as static bonds? And if not, how much should these names really be hurt by higher rates? And aren't higher rates usually a sign of economic strength, which could only be good for pipelines? Finally, that pipelines may trade in lockstep with some of the more commodity-exposed names should be seen as a blessing in disguise. If pipelines are the proverbial baby thrown out with the bathwater, we should see this as an opportunity to buy in at a reasonable or even discounted price.

KMP or KMI?
Collectively, pipeline giant Kinder Morgan Energy partners is a solid buy right now, but which Kinder Morgan security to buy, Kinder Morgan Energy Partners  (NYSE: KMP  ) or Kinder Morgan,  (NYSE: KMI  ) , depends on your preferences and time horizon. Both names are at or near their 52-week lows. KMI, for its part, is listed as a corporation and is eventually meant to be a general partner. At the moment, KMI does still have substantial assets, which it is dropping down to KMP. The most important takeaway is that KMI has a lower distribution coverage ratio and hence more room for distribution growth than does KMP. In 2014 management expects to grow KMI's distributions by about 8%. On the other hand, KMI's yield is a lower 4.78%.

KMP is the actual partnership vehicle that holds the bulk of (but not all of) Kinder Morgan's assets. Because KMP's distribution coverage ratio is a much tighter 1.01 times, and because KMI as a general partner has distribution rights, there is less room for growth out of KMP. Management expects about 5%-6% distribution growth, a bit less than KMI. However, KMP does yield a much nicer 6.93% right now, which makes it the better income option. If you don't mind having a partnership in your portfolio, KMP is a good bet as well, although its thin coverage ratio is a bit tight. 

Just plain good
While Kinder Morgan is certainly the biggest of the pipelines, by no means is it the only one trading around its low. Plains All American Pipeline (NYSE: PAA  ) has declined from a high of almost $60 this year to $48.90 today. That is a drop of over 18%. As a pipeline partnership, Plains has hitched its wagon to North American oil production and the displacement of seaborne crude imports. And that story is booming. It's no surprise, then, that Plains expects to grow both EBITDA and distributable cash flow by 11% and 12% respectively for the course of 2013. Plains' coverage ratio sits at a very high 1.41 times trailing 12 month cash flow, but that is expected to drop as the performance of the supply and logistics division comes back down to earth. But overall, a yield of 4.9% and expected growth of 11% backed by a solid secular growth story make Plains All American Pipeline a compelling choice right here.

Bottom line
There's a lot to like about pipelines right now: good yields, solid growth, and contracted cash flow well into the long term. All three names; Kinder Morgan, Kinder Morgan Energy Partners, and Plains All American, are great places to start. 

Income investing with The Motley Fool
Dividend stocks can make you rich. It's as simple as that. While they don't garner the notoriety of high-flying growth stocks, they're also less likely to crash and burn. And over the long term, the compounding effect of the quarterly payouts, as well as their growth, adds up faster than most investors imagine. With this in mind, our analysts sat down to identify the absolute best of the best when it comes to rock-solid dividend stocks, drawing up a list in this free report of nine that fit the bill. To discover the identities of these companies before the rest of the market catches on, you can download this valuable free report by simply clicking here now.

 


Read/Post Comments (1) | Recommend This Article (1)

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 December 20, 2013, at 6:27 PM, Sumflow wrote:

    Kmr offers the same claim on assets and income as Kmp but you get more shares when you buy it.

Add your comment.

Sponsored Links

Leaked: Apple's Next Smart Device
(Warning, it may shock you)
The secret is out... experts are predicting 458 million of these types of devices will be sold per year. 1 hyper-growth company stands to rake in maximum profit - and it's NOT Apple. Show me Apple's new smart gizmo!

DocumentId: 2772220, ~/Articles/ArticleHandler.aspx, 9/15/2014 12:05:24 AM

Report This Comment

Use this area to report a comment that you believe is in violation of the community guidelines. Our team will review the entry and take any appropriate action.

Sending report...


Advertisement