To find quality growth you must know what to look for and what to avoid. A good growth company is in a unique situation to ride long-term market trends. At the same time, you do not want to be stuck with a single-asset company that is subject to wild swings in revenue. Growing North American oil and gas production is creating new opportunities, but you must know where to look.
Strong growth MLPs
U.S. production of natural gas liquids has been in an uptrend since 2005, and Enterprise Products Partners (EPD +0.26%) is in a great situation to ride the trend. In the 12 months ending in September, 52% of its gross operating income came from its NGL pipelines and operations.
Enterprise Products Partners' pipelines are in the perfect position to bring NGLs down from the Midwest to the Gulf Coast where they can be used as feedstock in refineries. Right now refiners are starting to refit their facilities to use more cheap U.S. NGLs. Enterprise Products Partners expects NGL production to grow substantially from its current level of 2,657 thousand barrels per day (mbpd) to 5,153 mbpd in 2020.
While this company is a great way to ride NGL growth, it also offers diversity. Onshore crude oil pipelines and services, onshore natural gas pipelines and services, and petrochemical and refined products and services made up 45% of its gross operating margin in the past 12 months ending September. While NGL operations will suck up the majority of its growth capital for the next couple of years, 42% of its growth capital from 2013 to 2015 is slated for its petrochemical and onshore crude oil operations.
Magellan Midstream Partners (MMP +0.00%) is ready for growing U.S. refining. Instead of bringing feedstock to refiners, Magellan helps to bring refined products to its end markets. It aids international trade through its five marine-storage facilities on the U.S. Gulf Coast and East Coast. To provide diversification, it also has a small crude oil pipeline from the Permian Basin to Gulf Coast refiners.
Magellan is growing its refined-products pipeline business with its recent acquisition of 800 miles of pipeline in New Mexico and the Rocky Mountains. These acquisitions help Magellan become a better partner for Midwest refiners, which are looking for more markets with cost-effective transportation.
Currently the company is heavily slated toward the refined-products business, as this segment is 83% of its year-to-date third quarter 2013 operating margin. The upside for risk-conscious investors is that Magellan is working to become more diversified, with 75% of its 2013 to 2014 growth spending devoted to crude oil. Also, 60% of its expansion products, worth more than $500 million, are for crude oil. In the end, Magellan is well situated to benefit from the U.S. oil and gas boom thanks to growing crude oil pipelines and refined-products pipelines.
Inherently unstable MLPs
Northern Tier Energy (NYSE: NTI) is a good example of a volatile company with substantial exposure to a single asset. It owns a single refinery in Saint Paul, Minn. On Sept. 22 a fire in one of its crude units forced its refinery to undergo some unplanned maintenance and reduce quarterly refinery throughput and production by 7%. . Coupled with challenges from a tightening crack spread, its third quarter 2013 net income of $27.2 million was far below its Q3 2012 net income of $61.1 million.
On the positive side, Western Refining decided to buy Northern Tier's general partnership from private equity firm Acon Investments. Western Refining's involvement brings more industry expertise to Northern Tier Energy and should help improve its operations. Regardless, Northern Tier is too volatile and its underlying assets are too concentrated to fit the profile of a good growth MLP.
Terra Nitrogen (NYSE: TNH) is a concentrated play on the nitrogen industry, with its nitrogen manufacturing facility in Oklahoma. Its distributions are far from stable, having fluctuated between $5.01 in 2010 and $16.86 in 2012. Unlike many big pipeline MLPs with stable fee-based income, Terra Nitrogen's margins are dependent upon market conditions. Thanks to volatility in the global agricultural market, its margins and distribution payments are very unstable and do not provide steady growth.
Final thoughts
Quality growth MLPs require wide asset bases and established positions in growing markets. Enterprise Product Partners with its NGL pipelines and Magellan Midstream Partners with its refined products network fit the bill. Northern Tier Energy with its single refinery and Terra Nitrogen with its nitrogen manufacturing plant are on the other side of the scale with volatile margins and limited assets.
