3 Midstream MLPs Growing Their Distributions

For all the controversy surrounding hydraulic fracturing and horizontal drilling for natural gas, one thing remains unassailable: These techniques work. With booming natural gas production, prices dropped and would likely have stayed lower if not for visits by the polar vortex this past winter. So-called natural gas liquids (or NGLs) experienced a similar fate, except their price recovery occurred sooner, courtesy of exports.

Natural gas pipeline companies make a compelling investment. Regardless of who produces the gas or NGLs, it needs a way to get from the well to the customer. Below are three companies competing in the natural gas/NGL pipeline business. All pay distributions that have grown over the past five years. All claim their objective is to deliver growing returns to their investors.

By the numbers
Below is a table outlining some key metrics of Targa Resources Partners (NYSE: NGLS), El Paso Pipeline Partners (EPB), wholly owned by Kinder Morgan since 2012, and Williams Partners L.P. (NYSE: WPZ). Calculations are based on SEC or corporate data provided by the companies' respective websites.

By the company
Targa Resources offers investors exposure to the NGL export market. Targa owns a significant interest in fractionators in Mont Belvieu, Texas, a major hub of NGL processing and distribution. Fractionators separate the individual gas components of NGLs, for example propane and butane, based on their boiling points. From Mont Belvieu, Texas, NGLs are exported primarily to Latin America but with additional opportunities in the Far East and Europe.

Targa reported in its latest earnings announcement that its daily exports more than doubled over the previous year. These exports contributed to a record year for earnings and distributable cash flow. Expansion continues at its export terminal, and additional capacity should be online by the third quarter of this year.

During its latest conference call, Targa management was specifically asked about future export operations. In a nutshell, Targa anticipates growing exports of NGLs regardless of the Panama Canal expansion. Butane will become an increasingly important export commodity. Spot prices for NGLs helped drive earnings last year. However, given their volatility, management does not factor spot sales into its earnings guidance. 

El Paso operates two pipeline networks: one across the Georgia Atlantic Coast to Louisiana and the Louisiana Gulf Coast, the other stretching from Wyoming to the northern part of Texas. The company took a hit over the past two quarters when two settlements were reached leading to lower rates. These lower rates will continue impacting earnings in the future.

On the other hand, earnings will be buoyed by its other businesses. For example, El Paso will likely feed multiple US natural gas export terminals once exports begin in 2015. Its joint venture for its own liquefied natural gas facility on Elba Island on the Georgia coast will proceed. Lastly, El Paso is expanding its pipeline network in regions with either growing production or growing demand for natural gas.

Williams operates three major natural gas pipelines along the Atlantic and Gulf coasts and in the western U.S., including Oregon and Washington state. One big story for Williams is its Transco pipeline. Williams is expanding its presence in the Marcellus shale play with eight proposed pipelines, including the Atlantic Sunrise and the Constitution. With this expansion in the Marcellus, the Transco pipeline can relieve a bottleneck for natural gas going to domestic markets along the Atlantic and Gulf coasts. 

As an investment, Williams Partners looks dubious. The company's distribution coverage is less than 1.0 and its own projections are for the ratio to be below 0.9 for the next two years. This is well below the recommended coverage ratio of 1.0. Distributions have also been supported by debt and equity issuances, not earnings. When Williams Partners supports its distributions with earnings, then I'd take a look.

What about the corporation, Williams Companies (WMB 0.31%)? The company pays a 4% dividend which has really started to grow in 2011. The company projects 20% annual dividend growth through 2015. Earnings growth recently suffered from several issues, including supply problems with its Fort McMurray facility. Williams believes these problems are behind it, and future earnings will reflect this. How the recent explosion at its Washington state LNG terminal plays out is a wildcard. That said, Williams Companies looks safer than its master limited partnership counterpart.

Final Foolish thoughts
Each of these companies offers a different way to profit from natural gas pipelines. Targa offers an opportunity to gain from NGL exports. El Paso looks like a company beaten down by recent bad news regarding rate settlements but with an otherwise sound business. Williams Partners offers investors a way into the prolific Marcellus natural gas play. Each of these partnerships pays a growing distribution supported by growing earnings. The MLPs, particularly Targa, look good for immediate income, while Williams Companies looks interesting for long-term dividend growth with capital gains potential.