As the United States continues to tap the huge deposits of oil and gas being found on a regular basis, the infrastructure required to transport these finds consequently sees increasing demand and the need for expansion. This long-term trend is why midstream operators are among my favorite picks for the yield-oriented investor. They can be relied on for years to come due to the nature of the business, where it serves as a toll collector on owned assets in high demand that require minimal maintenance, much like a railroad.
While Kinder Morgan Energy Partners remains my personal investment choice in the group (recent article here), there are other examples of high-quality companies returning generous amounts of cash to loyal shareholders.
Williams Partners (NYSE: WPZ) got the memo that expansion was necessary. Over 2013-2015 it spent (or is projected to spend) approximately $7 billion-8 billion on expansions. That is quite a bit for a company with only a $20 billion market cap. But that is a drop in the bucket compared to the $29 billion it projects in growth investment spending by the end of 2018.
Aside from aggressive investment, Williams sports a solid yield of 7.13% which has increased approximately 35% over the last five years.
Buckeye Partners (BPL +0.00%) is filled with potential. Growth projections for this company are impressive with analysts predicting 15.55% earnings growth for 2014. Couple this with a yield of 6.40% and you have a recipe for profits.
But there is also spinoff potential here. The astute investor may remember that ConocoPhillips recently spun off Phillips 66, which then spun off Phillips 66 Partners. This successful strategy unlocked significant value for shareholders. As a result Valero is attempting a similar spinoff with Valero Energy Partners. Looking over the balance sheet it appears that Buckeye may be in a similar situation to unlock value by separating key segments. The company operates in five distinct areas: Pipelines and terminals, international operations, natural gas storage, energy services, and development and logistics. If management chooses to pursue a breakup strategy, Buckeye could be rewarding the investor in yet another way by unlocking hidden value.
Though a separation of key segments may be far off in the future, achieving high growth through organic capex is currently happening. Clark C. Smith, president and CEO, addressed the positive Q3 2013 results: "Investments in organic growth projects, including crude oil diversification and additional service capabilities in our Pipelines & Terminals segment contributed to our strong results." Smith continued, "We are well-positioned to generate strong financial results in the fourth quarter of 2013."
I'll go even further and state that acquisitions, expansions, and further increasing demand for its services should almost guarantee it a strong 2014 and beyond.
I really have saved the best for last with El Paso Pipeline Partners (EPB +0.00%). This stock recently suffered a massive price drop, which is when the long-term value investor's interest should be piqued. As a result of this price drop the yield has spiked to 7.64%, and with long-term growth prospects still intact this might be a good time to pick up some shares.
But El Paso has more than just an attractive dividend. Analysts are projecting a 10% increase in earnings for 2014. That is nothing new, since over the last five years El Paso has averaged almost 78% EPS growth. In fact, over that same five-year period management has passed the rewards onto shareholders, more than doubling the distriibution from $0.32 to $0.65 with no signs of this slowing.
Finally, El Paso is a member of the Kinder Morgan family. Richard Kinder is (in my opinion) the greatest CEO in the sector and runs all his companies with the shareholder in mind. So aside from the potential for growth and high dividends you are buying into the greatest management in the sector.
Foolish last thoughts
It's rare to find a company paying high dividends while poised for growth. But that's exactly what we are finding lately in the midstream sector due to the recent energy revolution that is still in its early stages. This sector should provide safety, high yields, and the potential for growth for years to come. Epitomizing this combination would be El Paso, Buckeye, and Williams, which all appear to be fine candidates for income investors.
