Searching for Income Growth? Look Offshore

Upstream spending is heading offshore, and MLP income investors need to follow the money.

Jan 13, 2014 at 9:47AM

Kinder Morgan Energy Partners (NYSE:KMP) and its general partner Kinder Morgan (NYSE:KMI) are buying tanker ships, and investors should take notice. The Kinder Morgan empire is known for its stable and long-term thinking. There are few companies that can boast of 49 distribution increases since 1997. The fact that such a respectable company is buying into the offshore market is a sign that it is worth a second look.

Kinder Morgan's plan
Thanks to the new ships, Kinder Morgan will have an easier time transporting crudes stuck on the coastlines to and from U.S. refineries. This deal will be small, just $962 million in cash and $214 million to finish the construction of three more ships. To help pay for the deal Kinder Morgan decided that it will wave $16 million of incentive distributions in 2014, $19 million in 2015, and $6 million in 2016.

Kinder Morgan's investors will come out ahead. The additional income should be relatively stable as the ships will not be on the spot market. The $140 million in additional annual earnings before interest, taxes, depreciation, and amortization works out to be a 2.8% boost over the $4.9 billion EBITDA Kinder Morgan Partners posted in the 12 months ending in the third quarter of 2013. 

The long-term picture
2013's big upstream finds point to strong offshore growth. From Brazil to the Canadian Bay du Nord, big oil is starting to develop and find major offshore fields.

Now that growth from new wells in onshore fields like Eagle Ford is starting to decrease, it is time that midstream companies start to move offshore as well. If Kinder Morgan wants to keep growing for decades to come, it needs to become comfortable serving new markets.

Other oil-transportation offshore MLPs
Teekay (NYSE:TK) and its Teekay Offshore Partners (NYSE:TOO) and Teekay LNG Partners (NYSE:TGP) are good companies to start looking at. The MLPs have a history of increasing distributions since 2006, and they do not operate in the spot market. By focusing on multi-year contracts, a large amount of the volatility in the shipping industry is removed.

The LNG market is a huge growth opportunity. BP expects it to grow 4.3% per year until 2030, when it will equal 15.5% of global gas consumption. Teekay and its Teekay LNG Partners MLP are in a good position to profit from LNG growth. Teekay LNG Partners already has 34 LNG carriers, 11 conventional carriers, and 33 LPG carriers, including 12 newbuilding LPG carries and five that are currently in-charter.

Teekay Offshore Partners owns 37 shuttle tankers, in addition to a number of floating production, storage, and offloading (FPSO) units, FSO units, and conventional tankers. Strong demand in the North Sea and Brazil has pushed Teekay Offshore Partners to make a number of new purchases. It recently bought the Remora HiLoad DP unit, and it should take ownership of the Salamander FSO in 2014.

Teekay Offshore Partners' long-term debt load of $1.9 billion is significant when compared to its total equity of $0.74 billion. The upside is that its shipping contracts are steady and its market is growing.

Teekay LNG Partners' long-term debt load of $2.1 billion and its total equity of $1.2 billion are relatively healthy. Also, Teekay LNG's recent ratio of distributable cash flow to total distributions is a respectable 1.1. The long-term fundamentals of the LNG market mean that Teekay LNG is the least risky MLP in the Teekay family.

Final thoughts
Kinder Morgan and Kinder Morgan Partners are two of the biggest names in the North American midstream market. They offer stable distributions, but management recognizes that it needs to explore new markets if it wants to grow. The Jones Act ships are a step in the right direction. Teekay LNG Partners is a good way to get your feet wet and test out the growing LNG market before it reaches its full potential.

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Joshua Bondy has no position in any stocks mentioned. The Motley Fool recommends Kinder Morgan. The Motley Fool owns shares of Kinder Morgan. 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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