The North American oil boom has literally changed the way oil flows in America. For decades oil flowed out of ships and into pipelines heading inland to our refineries. Now, it's flowing out of shale and into pipelines heading toward our coasts. It's a fundamental shift that the energy industry really never expected.
Because of that the industry has a problem, and it's a big one. It doesn't have enough pipelines to move all of this oil. In fact, it's estimated that the U.S. and Canada need to build $272 billion worth of new oil pipelines over the next two decades. However, here is where that gets exciting. Thanks to the tax advantages of master limited partnerships, or MLPs, investing in this $272 billion game-changer could be more lucrative than investors realize. That's because the IRS won't be able to touch a big chunk of the profits that will be made from operating these new pipelines.
Shifting the flow of oil
As the following chart from an Enbridge Energy Partners LP (NYSE:EEP) investor presentation notes, there is a lot of new oil flowing from the oil sands region of western Canada as well as North Dakota's Bakken shale into refining markets inside the U.S.
So much oil is now flowing from these areas that it has overwhelmed current pipeline takeaway capacity. This is why so much oil is being shipped by rail. Longer term we'll need to build new pipelines to move this oil.
However, MLPs don't just build oil pipelines because it's good for American energy security. These companies build them because of the superior economic return that can be earned by increasing capacity. On top of that, because of the MLP tax structure, these returns are then passed through to investors and have the added benefit of being shielded from double taxation from the IRS, meaning investors get to keep more of this windfall.
3 companies ready for this windfall
Enbridge Energy Partners, Plains All American Pipeline, L.P. (NYSE:PAA) and Energy Transfer Partners LP (NYSE:ETP) are three MLPs worth noting when it comes to building new oil pipelines in the U.S. These three companies are well position to invest an outsized share of the $272 billion required to build new oil pipelines over the next decade.
Enbridge Energy Partners and its parent, Enbridge (NYSE:ENB), are already the largest pipeline transporters of crude oil production growth from both Western Canada and the Bakken shale. However, the pair has $11.5 billion in commercially secured growth projects currently under way to grow that share even larger. Because of that growth, Enbridge Energy Partners has the visibility so that it expects to grow its tax advantaged income to investors by 2%-5% per year through at least 2017. With billions of dollars in additional oil projects still needed, there should be plenty of tax advantaged growth beyond that for investors.
Plains All American Pipeline also has a very strong portfolio of future oil pipeline projects. The company currently sees the potential to invest in over $7.5 billion in future projects over the next few years. As it builds these projects, and others to follow, it will grow the company's tax advantaged cash flow to investors. This is simply a continuation of what the company has been doing over the past couple of years as noted in the following slide.
A final name to look at is Energy Transfer Partners and its affiliate Sunoco Logistics Partners L.P. (NYSE:SXL). One of Energy Transfer Partners' growth drivers is its Bakken Crude Access Projects, which is intended to open up greater market access to Bakken crude oil. This project is part of Energy Transfer Partners' plan to derive more of its profits from moving oil. Meanwhile, Sunoco Logistics Partners, which Energy Transfer Partners partially owns, is focused on crude oil as it currently operates 5,400 miles of crude oil pipelines. Both companies will likely continue to invest to expand their oil pipeline networks in the future given the great need for new oil pipelines in the U.S.
America's oil boom has created a $272 billion growth opportunity for oil pipeline MLPs. Even better for investors, these profit opportunities come with a reduced tax burden as MLPs aren't double taxed and much of the income is also tax deferred.
Matt DiLallo has no position in any stocks mentioned. The Motley Fool recommends Enbridge Energy Partners. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.