The shale boom in the U.S. is creating tremendous growth opportunities for pipeline companies. Many of the larger pipeline companies are building tens of billions of dollars in new pipelines over the next few years. Their size and scale make them the best stocks to invest in the pipeline sector.
However, there are a number of other great pipeline stocks that have the potential to be solid investments in the future. What these companies lack is the visible growth of their larger peers. That said, these companies shouldn't be dismissed; instead, savvy investors should add them to their watchlist to see if that visible growth begins to materialize. Here are the five best ones to watch.
1. Boardwalk Pipeline Partners, LP (NYSE:BWP)
Boardwalk owns a fairly large natural gas and NGL pipeline network that stretches 14,625 miles, as well as several natural gas and liquids storage facilities. However, compared to the larger midstream companies, Boardwalk is fairly small: Its enterprise value is just $7.6 billion.
Boardwalk is in the process of growing the asset base, though, and it currently has $1.6 billion of planned growth projects that will primarily connect its existing natural gas pipeline infrastructure to demand-driven end users like petrochemical plants and natural gas power-generating facilities.
While Boardwalk's asset base is well positioned to grow, at the moment, it lacks the robust project backlog of its larger peers, which is why it's better off on a watchlist right now.
2. Buckeye Partners, L.P (NYSE:BPL)
Buckeye is about twice the size of Boardwalk, but it's still rather small compared to the energy midstream behemoths in North America. The company also tackles a different segment of the market, as it owns 6,000 miles of primarily petroleum product pipelines along with 115 liquid petroleum product storage terminals.
In addition to that, the company's business is a bit more global: It owns petroleum storage assets in the Caribbean, so it has more upside to the global oil trade. However, what Buckeye lacks is visible organic growth, as it doesn't have a very large project backlog compared to its peers.
3. Magellan Midstream Partners, L.P. (NYSE:MMP)
Magellan is similar to Buckeye Partners as its core business is built around petroleum product transportation. It owns 9,000 miles of petroleum product pipelines along with 52 storage terminals.
The company also has a growing crude oil transportation business and currently owns 1,600 miles of oil pipelines and 21 million barrels of oil storage. The problem is that this $20 billion company only has $1.2 billion of visible growth projects under construction, with another $500 million of projects under evaluation. That's not enough visible growth considering some of the pipeline giants are expected to invest more than Magellen's total current enterprise value on growth over the next few years.
4. Targa Resources Partners LP (NYSE:NGLS)
Targa Resources is primarily focused on natural gas and NGLs. About half of its business is gathering and processing natural gas, with the other half focused on downstream activities, including LPG exports. The company's strength lies in its Permian Basin gathering and processing position as well as its LPG export business, which is the second largest on the U.S. Gulf Coast.
Both of those businesses offer strong future growth opportunities: The Permian is one of the fastest growing shale plays, while LPG exports should continue to grow because of surging excess propane supplies in the U.S. That being said, Targa's visible growth isn't quite as large as other pipeline companies. It only expects to spend up to $900 million on growth capex in 2015, with upwards of $1.7 billion in total projects in progress. That's not an enormous backlog for a company that, when combined with the enterprise value of its General Partner, is roughly the same size as Magellan Midstream Partners.
5. MarkWest Energy Partners LP (NYSE:MWE)
MarkWest is also very focused on natural gas and NGLs as it's the second largest gas processor in the country, and it also handles 10% of the country's total NGL volumes. That's a lot of volume for a company of its size; its enterprise value is roughly $17 billion. The company is very much focused on growing its already large position; it plans to spend up to $1.9 billion this year alone on capex. Overall, the company has 20 major processing and fractionation projects under construction. Because of this, it expects to deliver long-term distribution growth of about 10% annually due to the growth it sees ahead of it.
That said, it is a much smaller company than the giants, and its small size could lead to more volatility for investors, which is why, in my opinion, it's better suited for a watchlist.
All five companies on this list share two things in common. First, they are all smaller in size compared to the larger pipeline companies that are multiple times larger. That puts them at a slight disadvantage, as size and scale are vitally important in the energy sector.
Further, while all five are investing in organic growth, none have the long-term backlog visibility of projects that we find at the larger pipeline companies. That being said, the opportunities these companies offer are compelling enough that investors should at least put these stocks on their watchlist to see if great visibility develops into future growth.
Matt DiLallo has no position in any stocks mentioned. The Motley Fool recommends Magellan Midstream 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.