Oil and gas companies are poised to plow roughly $300 billion into drilling more than 40,000 new wells in the Permian Basin over the next five years, according to a new report by IHS Markit. That investment has the potential to double the region's oil and gas production, putting it on pace to pump out 5.4 million barrels of oil per day (BPD) within five years. For perspective, that's more oil than Iraq currently produces.
There's just one problem with all of that production: It needs to get out of the basin, which is a problem right now since there aren't enough pipelines. Because of that, some of the best ways to play the Permian production boom are pipeline companies. Three companies perfectly positioned to profit from the Permian boom are Plains All American Pipeline (PAA 0.57%), Targa Resources (TRGP 0.68%), and Kinder Morgan (KMI 0.85%).
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An unmatched oil pipeline system
Plains All American Pipeline has invested heavily in expanding its footprint in the Permian Basin over the past few years. Last year, the company spent about $1.3 billion to acquire assets in the region while also investing heavily in organic expansion projects. These investments have helped the company build an unrivaled system to move oil from the wellhead to several major oil hubs. Overall, the company operates more than 4,700 miles of pipeline in the region that can transport 3.2 million BPD.
Plains All American plans to invest at least another $1.6 billion to expand its Permian infrastructure through the end of next year with two long-haul pipelines, gathering-system expansions, and other regional projects such as storage facilities. Those projects will position the company to grow cash flow at a double-digit pace in each of the next two years. Meanwhile, the company has other Permian-focused projects in development, including recently announced plans to pursue a joint venture with ExxonMobil to build a major oil pipeline out of the region. That Permian growth will position Plains to expand its 4.7%-yielding distribution to investors at a healthy clip for years to come.
Bulking up in the basin
Targa Resources has also spent a significant amount of money to expand its Permian Basin position in the recent past. Last year, the company paid $565 million to buy Outrigger for its natural gas gathering and processing assets as well as its crude oil gathering position in the region. This made Targa the largest gas gathering and processing company in the Permian.
In addition, Targa Resources has secured several expansion projects in the Permian that will drive growth in the coming years. Overall, the company has lined up about $2.4 billion of Permian expansion projects, which include building a major natural gas liquids (NGL) pipeline, partnering on a large gas pipeline, and constructing additional gathering and processing assets. These investments position Targa to expand earnings from $1.14 billion last year to as much as $2 billion by 2021, which should give the company plenty of fuel to grow its 7.5%-yielding dividend.
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One pipeline secured, another in the works
One of Targa's large projects is the Gulf Coast Express pipeline, a $1.75 billion natural gas pipeline developed by Kinder Morgan that should start service by the end of next year. That pipeline is the first notable Permian project for Kinder Morgan, which operates several natural gas pipeline systems in the region, including El Paso Natural Gas (EPNG) and the Natural Gas Pipeline Company of America (NGPL).
Gulf Coast Express is likely the first of many Permian-focused expansions for Kinder Morgan in the coming years. In fact, after securing shippers for 100% of the capacity on Gulf Coast Express, the company has already had initial discussions with shippers on a second pipeline. While those talks are in the very early stages, Kinder Morgan believes that there's enough industry demand to build a second line sooner rather than later.
Meanwhile, the company is looking at expansion projects on both EPNG and NGPL to move gas out of the Permian Basin to end markets in the Southwest and Midwest. As those projects materialize, they'll help grow the pipeline giant's cash flow and its 4.7%-yielding dividend.
Problem-solving can pay big dividends
Production out of the Permian Basin is growing at breakneck speed, which is starting to become a problem for producers, but an opportunity for pipeline companies. While several have expansion projects underway, three of the best positioned to capture future opportunities are Kinder Morgan, Targa Resources, and Plains All American Pipeline. Because of that, all three companies appear poised to grow their high-yielding dividends at high rates in the coming years, making them excellent options for income-seeking investors to consider.
