The number of trains carrying oil increased nearly 10% year over year between January and July, according to the U.S. Energy Information Administration, or EIA. Since it would be cheaper to move that oil by pipeline, this trend suggests that high-yielding midstream limited partnerships, or MLPs, have room to keep building out their businesses.
An oil run
The nearly 10% year-over-year advance in oil loadings at U.S. railways is nothing compared to the longer-term trend. According to the EIA, trains carried roughly 700 million barrels of oil a week, or less, until mid-2011. That was when things changed in a big way, with the a fairly steady increase to a recent peak above 1.5 million barrels a week. This amounts to about 8% of U.S. oil production.
Source: EIA
However, that's not spread evenly around the country. For example, 60%-70% of the oil coming out of the Bakken shale play in North Dakota was shipped by rail this year. That's an opportunity that Canada's Enbridge Energy Partners (EEP) is looking to take advantage of with its Sandpiper oil pipeline project, which recently got enough firm commitments to justify moving forward.
Enbridge Energy Partners sports an impressive yield of around 6.6% and is the largest oil pipeline company in the Bakken region. The Sandpiper project will just enhance the company's clout to this obviously pipeline-constrained area. The $2.6 billion project is expected to open for business in early 2016 and helps underpin the partnership's plans for regular annual distribution hikes of as much as 5%.
Not the only option
While Enbridge Energy Partners is a focused play on one region, there are other pipeline LPs that benefit from the overall shortage of pipes, as well. For example, Energy Transfer Partners (ETP), which yields a generous 6.7% or so, owns around 35,000 miles of natural gas and natural gas liquids pipelines. And it happens to own the general partner to Sunoco Logistics Partners (NYSE: SXL). Sunoco Logistics owns a diversified portfolio of crude oil and refined products pipelines. Why not buy Sunoco Logistics directly? It only yields about 3.2%. And since Energy Transfer Partners owns that partnership's general partner, 100% of the incentive distribution rights, and approximately 67 million LP units, it benefits from increasing distributions at Sunoco Logistics.
(Source: Public domain, via Wikimedia Commons)
While Sunoco Logistics is a good option for direct oil exposure, buying its general partner via Energy Transfer Partners nets you a higher yield, more diversification, and the chance to benefit from Sunoco Logistics' distribution growth.
Pipes and more
Another option is Tesoro Logistics (ANDX), which owns pipelines and terminals. In the second quarter, the crude oil pipeline segment only accounted for about 20% of revenues. However, the division's sales increased a stunning 50% year over year as Tesoro Logistics builds out an expansion of its High Plains Pipeline in North Dakota. The second quarter revenue increase was driven by just the "initial phase of the High Plains Pipeline reversal project."
And, as more oil is moving around, the company's storage assets will also be in high demand. So, too, are its smaller gathering pipelines that carry oil from the well to larger interstate pipelines. The partnership only yields around 3.6%, so it's most appropriate for growth minded investors. For those willing to take on a little more risk in search of a higher yield, NuStar Energy Partners (NS 1.93%) yields around 7% and looks to have successfully overhauled its business.
NuStar has been selling assets, like an asphalt business, and refocusing around its storage and gathering assets. Although the overhaul led to a suspension of distribution increases, the partnership is close to covering its distribution again -- which will likely mean regular distribution hikes resume in the near future.
Oil opportunity
With more and more oil being shipped by rail because there's not enough pipeline capacity to carry it, there's clearly opportunity for expanding the oil infrastructure assets that LPs like Enbridge Energy Partners, Energy Transfer Partners, Sonoco Logistics, and others own. That should mean continued growth for well-positioned high-yield partnerships all along the oil chain.
