Crashing oil prices have left many oil companies desperate to conserve cash and resulted in some painful dividend cuts. However, not all energy stocks are created equal, and the business models of pipeline operators such as Enterprise Products Partners (EPD 0.56%), Plains All American Pipeline (PAA -0.22%), Genesis Energy (GEL 3.98%), and Plains GP Holdings (PAGP -0.37%) have enabled them not only to weather the oil storm, but continue rewarding investors with growing distributions.
Learn why these four master limited partnerships are likely to continue growing their payouts to investors and deserve a spot on every income investor's radar.
The power of growing dividends
Numerous studies have shown that high-yielding stocks that consistently grow their dividends over time are the best long-term performing class of investment.
Which is why -- especially considering the severity of the oil crash -- investors should cheer the recent distribution hikes from these midstream MLPs.
| MLP | Yield | Recent Distribution Hike | Projected 5-Year Distribution Growth |
| Enterprise Products Partners | 4.4% | 5.6% | 5.5% |
| Genesis Energy LP | 5% | 10.9% | 10.5% |
| Plains All American Pipeline | 5.4% | 8.7% | 6.6% |
| Plains GP Holdings | 2.8% | 29.8% | 14.6% |
| S&P 500 | 1.93% | 5.2% |
Sources: Yahoo Finance, Multpl.com, Nasdaq, Fastgraphs.
Not only do these four pipeline operators each offer a yield that is greater than the market's, but analysts expect their payouts to grow faster than the S&P 500's over the next five years -- even with energy prices now much lower. How is that possible? The answer lies in their unique business models, which minimize their exposure to energy prices.
Midstream business model is a resilient distribution growing machine
The thing to understand about midstream MLPs -- which provide processing, transportation, and storage services for oil and gas -- is that it is a fixed-fee, long-term contract dominated business. For example, 77% of Plains All American's 2015's projected adjusted EBITDA, or earnings before interest, taxes, depreciation, and amortization, is derived from fixed-fee contracts, and management expects that to increase to over 80% in the next few years. This ensures long-term cash flow predictability, minimizes short-term exposure to falling oil prices, and allows MLPs such as these to sustain or even grow generous distributions in the face of a severe oil crash.
Source: Genesis Energy investor presentation.
Another benefit to these MLPs is that their asset bases are well diversified away from merely oil and gas pipelines. For example, Genesis Energy recently spent $157 million to buy the M/T American Phoenix -- a 330,000-barrel-capacity oil tanker with charters in place through 2020 -- to expand its marine storage business.
Meanwhile Enterprise Products Partners -- one of America's largest midstream operators -- has its finger in several major export growth markets, including liquefied natural gas, ethane, and ultra-light condensates -- a form of minimally processed crude oil. In addition, Enterprise, like Genesis, has also recently jumped into the oil tanker game with its acquisition of Oiltanking Partners.
Long-term market opportunities are enormous
As frightening as the recent petroleum crash has been for oil investors, what really matters is the industry's long-term prospect. On that front, the news is highly positive. In fact, according to a study by the International Energy Agency, by 2040 the world's oil demand is likely to increase by 14 million barrels per day, resulting in an additional $22.5 trillion in necessary investment by the oil industry over just the next 15 years.
America's enormous shale oil reserves are likely to play a major role in meeting that demand; according to energy research firm ICF, $641 billion of new midstream infrastructure will be needed to support America's growing importance in world oil and gas markets over the next 20 years.
With decades of enormous midstream demand ahead, I'm confident that long-term investors in these MLPs can expect many more years of strong distribution growth.
Investor takeaway
Despite low oil prices the energy sector still offers high yield-seeking income investors great long-term investment opportunities. While not completely impervious to low energy prices, these midstream operators' fixed-fee, long-term contract-based businesses and diversified asset bases help minimize the effects of short-term commodity exposure, and allow them to reward investors with resiliently growing payouts. With the enormous expected increase in global oil and gas demand over the coming decades, combined with America's epic shale production potential, I expect each of these MLPs to serve long-term income investors well -- both via income generation and market-beating total returns.
