Can Enterprise Products Partners and Kinder Morgan Energy Partners Cash in on America’s Infrastructure Boom?

A recent study predicts America will need to triple its annual investment in infrastructure over the next 20 years. This article points out two MLPs who are well positioned to profit from this bonanza.

Adam Galas
Adam Galas
Apr 28, 2014 at 1:27PM
Energy, Materials, and Utilities

In the last decade, the U.S. has spent approximately $10 billion per year on infrastructure. A recent study by ICF says that this number will need to triple over the next 20 years as $641 billion in infrastructure needs are met. Energy will represent a major portion of this investment, as America's oil and gas boom grows in size and scale. A recent study by Wood Mackenzie estimates that by 2020 natural gas demand will increase from its 2014 levels of 71.5 Bcf/d (billion cubic feet/day) to 90 Bcf/d on its way to 94.5 Bcf/d in 2024. This 47% increase in gas demand will be fueled by LNG (liquefied natural gas) exports, increased use of gas for power generation, and exports to Mexico. 

This article covers two of the largest midstream MLPs -- Kinder Morgan Energy Partners (UNKNOWN:KMP.DL) and Enterprise Products Partners (NYSE:EPD). These behemoths of oil and gas transportation and storage have both the expertise and the financial resources to cash in on the coming infrastructure boom. Patient, long-term investors can partake in the bounty and ride a gravy train of stable, growing yield and strong capital gains for decades to come. 

Kinder Morgan: silencing the critics
Recently Kinder Morgan has faced many naysayers who claim the company's best growth days are behind it (despite management recently reiterating guidance of 5% distribution growth). The first quarter earnings results proved these critics wrong with America's largest pipeline partnership reporting record results and offering a very strong outlook for the future. 

  • January gas volume hit a record of 33 Bcf/day, representing 33% of all gas transported in the U.S. 
  • Distributable cash flow (DCF) up 26%.
  • Distribution increased by 6% (representing 12 out of the last 13 years distribution has met or exceeded guidance). 
  • Distribution coverage ratio up from 1.07 to 1.12 (1.1 is considered safe and a sign that growth is likely to continue).

More importantly for future investors is the growth in the backlog of future expansion projects. Last quarter it stood at $14.8 billion, this quarter it's up $2.4 billion to $16.2 billion (16.2% increase). Obviously, Kinder Morgan has many years of strong growth ahead of it, but there is one further growth catalyst investors should consider. 

Investment Bank Credit Suisse has recently written a report outlining why and how Kinder Morgan Energy Partners should merge with its general partner (gp) Kinder Morgan Inc. The benefit to the MLP would be the elimination of incentive distribution rights (IDRs) that cause the partnership to pay 50% of marginal DCF to its general partner. A merger would thus allow for a doubling of the distribution growth rate. It would also likely result in an expansion of the MLP's valuation. Kinder trades at a 45% discount to Enterprise Products Partners (which merged with its gp) on a price/DCF basis. This brings me to the other MLP investors should consider. 

Enterprise Products Partners: "Old Faithful" of distribution growth
This MLP has raised its distribution for 39 consecutive quarters. Over the last 16 years, it has grown the distribution by 7% CAGR and analysts are projecting a 7.2% CAGR over the next decade. With a healthy 3.9% yield, this means that distribution growth alone is likely to support 11% annual total returns over the next decade (the stock market's 1871-2013 total return has been 9% CAGR). There are three strong growth catalysts that make it very likely this MLP will meet or even exceed expectations. 

First is the partnership's short- to medium-term growth, due to investments and expansion projects. In 2014 alone, Enterprise has $5 billion in investment projects coming online and in the next few months will begin the expansion of its Seaway pipeline (which transports oil from Cushing, Oklahoma to the Gulf for export). This will more than double capacity from 400,000 bpd to 850,000 bpd.

The second reason is the growth in demand for natural gas that will drive production increases. Two key drivers of this demand growth are LNG exports and gas exports to Mexico. LNG exports are beginning in 2015 and expected to reach five to six Bcf/d by 2020 (5.6%-6.7% of expected 2020 gas production). 

The final growth catalyst is rising production of NGL (natural gas liquids). Export demand for NGL is expected to double by 2020, resulting in 79% growth in production. Enterprise's pipelines will carry a great deal of this increased output.

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Foolish takeaway
America's energy boom has made many investors rich, but this bonanza is part of a megatrend that is likely to continue for decades. Kinder Morgan and Enterprise Product Parters have the management expertise along with the massive financial resources to maximize unit holder benefits from this historical opportunity. They offer: safe, high yields, strong, consistent distribution growth, and prospects for good capital gains for years to come.