Thanksgiving is in the rearview mirror, and most people are firmly focused on surviving the holidays, signaling the fast-approaching end of another year. With that in mind, it's a good time to evaluate some of the top-performing stocks of the year.
Why would we look at stocks that have already run big? In many cases, the best performers continue to perform well, so instead of assuming you "missed out" on a great investment, it's worth taking the time to look at the future prospects, especially in an industry primed for sustainable returns. The natural gas business is one of those places right now, so let's look at some of the top natural gas stocks for 2014: Cheniere Energy (NYSEMKT:LNG), EQT Midstream Partners (NYSE:EQM), Tallgrass Energy Partners (NYSE:TEP), and Western Gas Equity Partners (NYSE:WGP).
The value of being in the middle
You know what's interesting about this list? It is dominated by the midstream sector -- companies that are in the business of transporting and storing natural gas, and not natural gas producers.
EQT Midstream Partners, Tallgrass Energy Partners, and Western Gas Equity Partners are all pipeline and storage facility operators or, in the case of Western Gas Equity Partners, exist solely to manage another entity -- Western Gas Partners, LP (NYSE:WES), which owns and operates the pipelines. The benefit? These companies are largely insulated from the fluctuations of gas wholesale prices, as their business is simply moving gas from where it is produced, and distributing it to where there is demand.
Furthermore, the vast majority of the business they do is tied to long-term agreements, and these contracts can run for more than 10 years, and with guaranteed minimums as well. This situation leads to dependable cash flows that are as predictable as they come -- a huge benefit for investors.
A special class that can enhance returns
It's also worth pointing out that all three of these midstream operators are MLPs, or master limited partnerships. This is a special class of stocks, and they're treated differently from a traditional corporation. First off, these aren't corporations -- they're partnerships. The partnership is made up of two segments: the limited partners -- which are like common shareholders -- and the general partner, which is the managing partner, compensated based on the performance of the venture.
Why this complicated structure? Well, it's really not that complicated. The idea behind MLPs is that companies such as Anadarko Petroleum, which formed the Western Gas MLPs, is able to shift assets such as pipelines into the partnership, which you and I can then invest in. Since it's a partnership and not a corporation, it doesn't pay corporate income taxes, which means that dividends -- called distributions -- can be substantially larger and more regular than under a traditional corporate structure.
So the corporate parent, now acting as the general partner, can deleverage itself and free up capital by spinning assets down to the MLP level, and this structure can make for a more efficient cash flow machine. The three MLPs I've listed all operate pipelines located in areas of expanding natural gas production, and terminating in markets where demand is strong. They also pay a dividend, and it's reasonable to expect all three to gradually increase payouts over time:
Shipping it out ... eventually
Cheniere Energy started out as a natural gas import terminal, but the domestic shale boom changed that. Over the past three years, the company has been constructing one of the largest natural gas export terminals in the world, and what will be easily the largest in the U.S. when it goes online in 2015.
The thing is, it hasn't really begun exporting. The first train -- the unit that converts CNG to LNG for shipping -- will begin going online in 2015, but all six trains and full capacity won't be reached before probably 2017 or 2018. However, the company has billions in contracts already in place, as well as federal approval to export LNG. It gets even better: It will be several years before any other export facilities come online, giving Cheniere a significant head start in the market.
Cheniere also has a massive debt load -- almost $9 billion at the end of the most recent quarter. Furthermore, that debt is likely to increase in order to fund the company's expansion. However, Cheniere also secures long-term contracts with guaranteed minimums, something that will help provide a margin of safety, and predictable cash flows in years ahead.
It's worth pointing out that if you consider investing in the MLPs, you need to be familiar with the company that owns the general partner. In the case of Western Gas Equity, it's Anadarko Petroleum, while EQT Midstream, of course was formed by EQT Corporation, one of the largest natural gas producers in the United States. This setup is typical of MLP structures, and since the MLP will have close ties to the general partner, make sure that the business behind the MLP matches up with your investing principles.
With that said, all three of these MLPs are relatively well positioned going forward. And while it's not fair to expect them to perform as well in 2015 as they have this year, midstream MLPs can be incredibly dependable sources of steady growth, and income at the same time. Most importantly, domestic demand for natural gas is set to grow, as its use in manufacturing, electricity production, and home consumption increases in coming decades.
As for Cheniere, remember that your investment is tied to its potential in the LNG export business, and it will still be more than a year before the company is operating at any level of capacity. Until then, the stock could move a lot on nothing more than speculation. Furthermore, it's a little more exposed to natural gas prices, because cheap domestic natural gas is the key that makes exporting economically viable.
Jason Hall and The Motley Fool have no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools don't 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.