America's energy boom is proving to be one of the largest gold rushes in history. And just like in most gold rushes, a great way to get rich is by selling the picks and shovels. In this case that means the midstream side of energy production. Things like gathering and transportation pipelines, gas processing, and natural gas liquid (NGL) separating equipment are in high demand and could provide investors with decades of strong growth.
For example, through 2026 IHS estimates that $890 billion will need to be invested into America's energy boom. That's music to the ears of midstream MLPs such as TC Pipelines (TCP +0.00%) and EQT Midstream Partners (EQM +0.00%), as well as their general partners TransCanada (TRP 0.14%) and EQT (EQT +0.42%). This article will highlight the latest news from these midstream companies and explain why each makes a solid long-term way of profiting from America's historical energy gold rush.
Pipelines to profits
| MLP/Company | Yield | 10 Year Projected Annual Earnings Growth | 10 Year Projected Annual Distribution/Dividend Growth | 10 Year Projected Annual Total Return |
| TC Pipelines | 6.60% | 7% | 5.68% | 12.28% |
| TransCanada | 3.80% | 8.60% | 7.36% | 11.16% |
| EQT Midstream Partners | 2% | 17.60% | 19.55% | 21.55% |
| EQT Corp | 0.10% | 26.50% | 17.85% | 35% |
| S&P 500 | 1.88% | 9.20% |
TCP Sources: S&P Capital IQ, Yahoo! Finance, Moneychimp.com
TransCanada's Keystone XL pipeline has long been a political hot potato. In January the state department issued an environmental impact study stating that the pipeline wouldn't significantly increase CO2 emissions, but a Nebraska judge recently voided several state laws that allowed approval of the proposed route.
But as annoying as years of delay and political grandstanding are, investors should realize that TransCanada is a massive company, with 42,500 miles of pipelines and 20 power stations with 10.8 GW of electrical generating capacity. TransCanada has a total of 15 projects under development worth $36 billion.
Source: 2014 TransCanada Annual Meeting presentation
Thus the Keystone XL represents just 15% of TransCanada's backlog, which is projected to grow EBITDA (earnings before interest, taxes, depreciation, and amortization) by 94% through 2020.
TransCanada's largest project is the $12 billion 4,600 kilometer Energy East Pipeline, which will transport 1.1 million barrels/day of Alberta crude to refineries in Eastern Canada. The project is scheduled to be completed in 2018 and already 900,000 barrels/day of capacity have been contracted.
In its most recent quarter TransCanada reported 15% earnings growth and 20% growth in funds from operations (FFO). This is similar to the 19% and 22% earnings and FFO growth achieved in 2013.
With such a diverse and massive backlog of projects TransCanada's historical dividend compound annual growth rate of 7% is likely safe for the foreseeable future.
TransCanada's midstream MLP, TC Pipelines is also worthy of investor consideration.
Source: NAPTP 2014 MLP Investor Conference presentation, page 10
TransCanada plans to drop down $5 billion in assets to TC Pipelines over the next six years, growing TCP by 167%. Already TransCanada's drop downs are helping TCP achieve immense growth.
For example, in its latest quarter TC Pipelines reported an 83% increase in cash flows and a 45% increase in earnings per unit. This was due to TransCanada dropping down 45% of its GTN and Bison pipelines to TCP in July of 2013 for $1.05 billion.
Thanks to this growth, TC Pipelines was able to raise its distribution 3.7%, on top of a 3.8% raise last year.
EQT Midstream is a small but rapidly growing midstream MLP that owns 1,000 miles of pipelines in the Marcellus/Utica shale, a formation that's expected to increase its production 34-fold between 2007 and 2035.
EQT Midstream's general partner, EQT Corporation, is one of the largest independent oil and gas producers in America owning:
- 560,000 net acres in the Marcellus shale
- 170,000 net acres in the Utica shale
- 1.4 million net acres in Kentucky's Huron shale
- 72,000 net acres in the Permian basin
EQT Corporation just announced solid second quarter earnings. Production was up 17%, resulting in revenue gains of 9% and adjusted operating income growth of 16%.
For EQT Midstream things were even better, with volumes up 17%, revenues up 33%, and operating earnings gains of 13%. EQT Midstream topped a blowout quarter by raising its distribution 6.1% above last quarter's level and 30% higher than last year. In fact, EQT Midstream is guiding for $0.03/unit distribution increases every quarter through the end of 2016.
That's 29% distribution growth in 2014, 22% in 2015, and 20% compound annual growth from 2016 through 2019.
The key to EQT Midstream's phenomenal quarter was its acquisition of the Jupiter gathering system from EQT Corporation in May 2014 for $1.2 billion. These 35 miles of gathering pipelines in southwest Pennsylvania's Marcellus shale are capable of transporting 225 million cubic feet/day (mmcf/d) of gas and will be expanded to 550 mmcf/d by the end of 2015. They have 10-year contracts and represent both enormous future growth for EQT Midstream and the benefits of having such a large and well established general partner. Future drop downs from EQT Corporation are sure to fuel continued strong distribution.
Foolish takeaway
The saying goes that the safest dividend is the one that's just been raised. Long-term income investors can rest assured that TransCanada and EQT Corporation, as well as their midstream MLPs, TC Pipelines and EQT Midstream, are solid income plays destined to prosper over the years to come.
