3 Midstream Oil and Gas MLPs to Buy for the Dividends

by Susan J. Aluise | August 15, 2011 12:12 pm

Face it: It’s hard to miss all the heat and light surrounding the oil and gas industry these days. But the roller-coaster ride of fuel-price volatility is enough to make even the most stoic investors get a little emotional.

But if you look beyond oil and gas giants like Chevron (NYSE:CVX[1]) and ExxonMobil (NYSE:XOM[2]), or even oil services firms like Halliburton (NYSE:HAL[3]) and Baker Hughes (NYSE:BHI[4]), you can find quality jewels many investors miss — midstream oil and gas master limited partnerships.

These investments offer two winning sides to the same coin. Midstream is one of the three components of oil and gas operations. It focuses on transportation (as in pipelines), processing, storage and marketing of gas and oil supplies — an increasingly critical part of the market.

The dramatic growth in new North American shale oil and gas plays and growing power-generation needs will drive midstream investments of more than $8 billion per year through 2035, the Interstate Natural Gas Association of America concluded in a recent study. Also, midstream operations make their money on the volume of fuel going through the pipeline, insulating them from much of the actual price volatility.

The MLP structure can offer tax advantages as well and many midstream MLPs offer attractive dividend yields to boot. Here are three midstream MLPs to consider:

DCP Midstream Partners LP

DCP Midstream Partners LP (NYSE:DPM[5]) hit a new 52-week high of $44.80 on May 2. At $38.29, it is trading more than 23% above its 52-week low of $31.04 last August. The partnership has a market cap of $1.69 billion and has experienced quarterly earnings growth of 59.6%. Return on equity is 6.56%. Although many midstream MLPs have a high price/earnings-to-growth ratio, DPM is higher than most at 5.87, indicating that it’s overvalued. But DCP’s distributions (an MLP’s version of a stock’s dividend yield) is an attractive 6.6%.

Magellan Midstream Partners LP

Magellan Midstream Partners LP (NYSE:MMP[6]) set a new 52-week high of $63.10 on April 29. At $58.95, it is trading 22.56% above its 52-week low of $48.10 last August. The partnership has a market cap of $6.65 billion, but quarterly earnings growth is only 0.5%. Magellan’s PEG ratio is 3.14, meaning it is overvalued; its return on equity, however, is an attractive 25.16%. MMP’s distribution is 5.4%.

Crestwood Midstream Partners LP

Crestwood Midstream Partners LP (NYSE:CMLP[7]) hit a new 52-week high of $33 on April 25. At $25.24, it is trading more than 16% above its 52-week low of $21.72 last August. The partnership has a market cap of $944.73 million and has experienced quarterly earnings growth of 51.5%. Return on equity is a solid 16.41%. Crestwood’s PEG ratio is 2.4 — still high enough to look overvalued — but CMLP’s distribution is a stellar 7.3%.

Bottom Line

Midstream MLPs are a good way for income investors to play the energy sector because there is less price volatility and high quarterly income from distributions. Now, no investment is without risk — MLPs can be more vulnerable to tighter credit markets and the average daily trading volumes are smaller (Halliburton trades an average 12 million shares per day; MMP’s average is about 260,000). Still, for many income investors, they’re worth a closer look.

As of this writing, Susan J. Aluise did not hold a position in any of the stocks named here.

Source URL: https://investorplace.com/2011/08/midstream-oil-gas-mlps-dividends/

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