Yes, oil is trading at multi-year lows, and it looks like this trend will continue well into 2015. The decreasing oil price is certainly bad news for U.S.-based oil and gas exploration and production (E&P) firms, whether they’re onshore looking for shale energy or offshore.
Low oil prices are also bad for equipment companies that supply the parts, machines and piping that keep the E&P sector going. And integrated super oils won’t have it so good either. They will be cushioned since they’re better diversified but when demand is low, it’s hard to make a lot of money.
But there’s one sector that will continue to prosper — pipelines, or as they’re called in the oil patch, midstream players.
In the energy industry there are three basic sectors:
- E&P, the drillers and exploration companies
- Midstream, the pipeline and storage companies
- Downstream, the refiners and distributors of finished products
Now the big oil companies like Exxon Mobil Corporation (XOM), are involved in each sector, but generally have most of their assets focused on E&P and Downstream. The Midstream players have spent a lot of money on building and maintaining pipelines that get ship oil and gas and natural gas liquids all around the country.
This business makes money when people are using oil and gas. It doesn’t matter whether oil is $100 a barrel or $50 a barrel. They get paid by volume.
And even though there’s a lot of oil around now, cheap gasoline means a rise in demand as more people around the world take to the roads (record car sales in the U.S. and more drivers in China and Asia).
Also, cheap natural gas from shale means more industrial energy is converting from coal to natural gas and liquefied natural gas (LNG). The biggest ship in the world is being built right now by Samsung Industries, and it’s an LNG tanker. That speaks volumes, since taking on a multi-billion dollar investment like this is a long-term play.
Here are three midstream players that are in great position to take advantage of the energy patch’s new dynamics. Two are A-rated Portfolio Grader picks, and one is a C-rated play that has a lot of upside potential now and kicks off a very nice dividend.
Magellan Midstream Partners, L.P. (MMP)
Magellan Midstream Partners, L.P. (MMP) is a petroleum pipeline MLP that has about 9,600 miles of pipeline and 50 terminals. Petroleum terminals include storage terminal facilities (consisting of six marine terminals located along coastal waterways and crude oil storage in Cushing, Oklahoma) and 27 inland terminals. Last year, MMP also acquired assets in the Rocky Mountains.
Whether the much debated Keystone XL pipeline goes through or not, the Keystone pipeline has been open and makes this region of U.S. very good territory midstream operators. Magellan may not be the biggest midstream firm out there, but it’s strategically well placed.
And while you wait for cooler heads to prevail in the oil patch, it’s a good time to scoop up this all-weather, A-rated MLP and get paid a little over 3% as a dividend for your patience.
MPLX LP (MPLX)
MPLX LP (MPLX) is our other Portfolio Grader A-rated MLP pick. MPLX is an example of Big Oil spinning off an operation in one of the specific sectors.
MPLX was formed by Marathon Oil Corporation (MRO) to own, operate, develop and acquire crude oil, refined product and other hydrocarbon-based product pipelines and other midstream assets. MPLX runs product pipeline systems and associated storage assets in the U.S. midwest and Gulf Coast regions.
Things seem to be going well for MPLX since Marathon just increased its 51% controlling interest 10% to 56% earlier in 2014.
At this point, the bet is on growth since its solid 2% dividend isn’t the compelling reason to buy MPLX, a gem of a midstream MLP.
Holly Energy Partners, L.P. (HEP)
While Portfolio Grader gives Holly Energy Partners, L.P. (HEP) a middling C rating overall, there are a couple things to bear in mind with this underdog.
First, HEP is another Mid-Continent player, which means it’s well located for moving a lot of energy from the major shale plays in the region. Holly Energy is also a play on the huge potential U.S. energy export market that will be shaping up in coming years. HEP also has some refining operations, which gives a bit of a downstream kicker as well.
Second, HEP stock’s overall rating is reflecting a Quant Grade, which is a C, and its Fundamental Grade, which is a B. Basically, HEP stock is getting beaten down here because of the secular downtrend in energy companies, but Holly Energy Partners is solid.
Now, it may not bounce back tomorrow, but when you’re getting a 7% dividend to wait for better times — or just until traders stop treating midstream companies like E&P companies — there’s a good reason to buy in cheap and have some patience.
Louis Navellier is a renowned growth investor. He is the editor of five investing newsletters: Blue Chip Growth, Emerging Growth, Ultimate Growth, Family Trust and Platinum Growth. His most popular service, Blue Chip Growth, has a track record of beating the market 3:1 over the last 14 years. He uses a combination of quantitative and fundamental analysis to identify market-beating stocks. Mr. Navellier has made his proven formula accessible to investors via his free, online stock rating tool, PortfolioGrader.com. Louis Navellier may hold some of the aforementioned securities in one or more of his newsletters.