The American energy revolution is here. In 2008, the U.S. produced 5 million barrels per day of crude oil, and as of July 2013, the U.S. was producing 7.5 million bpd. The IEA predicts the U.S. could produce as much as 10 million bpd somewhere between 2020 and 2040. All of this oil needs to be transported somehow, and there are midstream companies out there looking for your investment.
Gushing Texas tea
The Permian Basin is a major shale play located in the western part of Texas and part of New Mexico, and growth is expected to be huge. E&P players will need the necessary infrastructure to move current and future production to refineries. Oil production is expected to rise to 3 million bpd from 1.2 million bpd (2012 production level).
Plains All American Pipeline (PAA -0.91%) has been investing in the Permian Basin and will have spent $135 million to bring online 200,000 barrels a day of transportation capacity via pipelines by year's end.
Another project Plains has planned is the Cactus pipeline, which will transport 200,000 bpd to the Eagle Ford region. The project will cost between $350 million and $375 million.
Once these pipelines come online they will be generating roughly $500 million a year in cash flow minus expenses (assuming $3-4 a barrel fees), which will translate into a larger bottom line for Plains. Plains will be able to use that cash flow to reinvest in its business or to boost its distribution.
Plains is a master limited partnership that pays out a distribution of 4.6%, and management has guided for a 10% increase each year for the foreseeable future.
Enterprise Products Partners (EPD -0.62%) is an MLP with a 4.5% distribution and several big projects coming up, one of them being an expansion to its Eagle Ford 50/50 joint venture pipeline.
Enterprise and Plains are going to expand the pipeline's carrying capacity by 120,000 bpd. The expansion will cost $120 million and should be completed by 2015. The extra capacity will bring in $85 million a year minus expenses for both companies.
Enterprise has $920 million in distributable cash flow and spends $620 million on its distribution. This gives it a coverage ratio of 1.49, and with the addition of the cash flow from the JV pipeline, Enterprise could very well raise its distribution.
But Enterprise has more than just one project to rely on for future growth: It also has the Seaway Crude Pipeline expansion. The Seaway pipeline is going to transfer crude from Cushing, Oklahoma to Gulf Coast refineries. The Seaway pipeline is another 50/50 JV, but this time between Enterprise and Enbridge (ENB -3.62%).
Currently, the pipeline can transport 400,000 bpd, but by the first quarter of 2014 that will increase to 850,000 bpd. At $4 a barrel, the pipeline will be bringing in $1.27 billion a year in cash flow minus expenses.
Enterprise's high coverage ratio gives it room to increase its distribution, as do the many projects it is currently engaged in. When the JV pipelines in the Eagle Ford and the Seaway come online Enterprise will find itself with more cash flow that it can pay out to investors and use to build more pipelines. This makes Enterprise a good long-term buy for both income and distribution growth.
Enbridge owns a 23% stake in Enbridge Energy Partners, which along with Enterprise Products Partners and Anadarko Petroleum plans on building the Texas Express Pipeline, which will be able to transport 280,000 bpd.
The pipeline will move oil from Carson County, Texas, to a storage facility in Mont Belvieu, which is owned by Enterprise Products Partners. Enterprise will be able to pick up additional cash flow in the form of storage fees, which further enhances its investment prospects.
Enbridge will be making money off the project in the form of a 7.3% annual distribution from Enbridge Energy Partners. That distribution could get a lot fatter once Enbridge's joint $6.2 billion project is put into effect. Enbridge and Enbridge Energy Partners are planning on changing the entire landscape of oil transportation in the Bakken and will likely create large new sources of cash flow for both companies.
Booming production is creating a need for more pipelines, and these operators are happy to increase capacity. Pipeline operators can use cash flow from existing assets to invest back into the business and increase capacity, which boosts their bottom lines. This is what enables them to grow.