In the first quarter of 2014 America smashed through its previous oil production record of 9.7 million barrels/day (bpd), set in 1970, to achieve a staggering 11 million bpd and become the world's largest oil producer.
The Energy Information Administration (EIA) predicts US gas production will increase 56% by 2040.
Shale formations such as the Marcellus and Utica are expected to increase their production 34-fold between 2007 and 2035.
IHS Global, a leading information and analytics company, believes that by 2026 the US will require $890 billion in additional energy investment, in things like new pipelines, storage, and processing facilities. They estimate this will create as many as 1.1 million jobs and add $120 billion/year to the economy, resulting in a 0.71% increase in the GDP growth rate.
With such staggering sums bandied about investors need to know where they can invest to profit from this historical bonanza. This article outlines two excellent pipeline MLPs that are poised to make long-term investors exceedingly rich in the years to come.
Note, these two MLPs pay distributions, not dividends. The difference is that distributions are tax deferred and require a K-1 form instead of a 1099 form. They can cause tax headaches when held in tax deferred accounts such as IRAs.
|MLP||Yield||10 Year Projected Annual Earnings Growth||10 Year Projected Distribution Growth||10 Year Projected Annual Total Returns|
|Magellan Midstream Partners||3%||14.10%||14.29%||11.10%|
|MarkWest Energy Partners||5.10%||62.20%||37.50%||67.10%|
Magellan Midstream Partners (NYSE: MMP ) and MarkWest Energy Partners (NYSE: MWE ) have both handily outperformed the market in the last 13 years, with Magellan Midstream being one of the best investments of the last decade.
There is good reason for this outperformance, and strong growth catalysts for Magellan Midstream to continue beating the market over the next decade, although not to the previous extent.
The case for Magellan Midstream Partners
Magellan Midstream Partners is the largest refined fuels pipeline operator in America, with 9,500 miles and 54 distribution terminals.
The key to Magellan Midstream's success has been its cost structure and management. For example, Magellan Midstream bought out its general partner in 2009, at the peak of the financial crisis, for just eight times earnings before interest, taxes, depreciation, and amortization (EBITDA). This removed its incentive distribution rights and lowered its cost structure substantially, allowing it to grow its distributions by 13% annually for 13 years.
Magellan Midstream's management is one of the best at taking advantage of opportunistic acquisitions. In 2010 after the BP oil spill, BP was forced to sell assets -- Magellan acquired $289 million worth of oil storage and petroleum pipelines for just 8-9 times EBITDA.
Over the last decade Magellan Midstream has shown the same knack for deals, executing $3.7 billion in accretive acquisitions and organic investments.
The Longhorn pipeline is an oil pipeline from the Permian Basin to Houston. Its expansion increases its capacity by 50,000 bpd, costs $430 million, but will pay for itself in only three years. It comes online in early 2015.
The Double Eagle pipeline is a joint venture with Kinder Morgan that will transport 100,000 bpd of condensates from the Eagle Ford shale to Magellan's Corpus Christi condensate splitter, which will have a capacity of 50,000 bpd of condensate. It will cost $250 million, allow for exports of ultra-light crude, and pay for itself in just six years.
Interested investors should dollar-cost average into Magellan Midstream due to its current valuation, a well deserved but lofty 23 times cash flows -- double its historical average.
MarkWest Energy Partners: pipeline king of the Marcellus shale
MarkWest Energy Partners is the leading pipeline provider for the Marcellus, Utica, and Haynessville shales. The Haynesville shale is set to supply the coming LNG export boom along the Gulf Coast.
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