With the energy markets still shaky, investors looking for some stability and income have turned to the various midstream master limited partnerships (MLPs). These firms — owning miles of pipelines, gathering systems, terminals and other energy logistics assets — act as middlemen. The midstream MLPs shuttle crude oil, natural gas and other fossil fuels from producers to end users.
For the midstream MLPs, there’s very little commodity price risk as earnings are generally based on volumes and other capacity agreements. That makes them great picks for times of oil price volatility, like we are going through today.
And when you’re looking for the stablest of the stable, you can’t beat the mega-cap and elder statesmen MLPs. Their sheer size and scope provides a huge safety net for investors — and some of the best dividends in the sector.
Here’s three big MLPs that are big buys:
3 Big MLPs To Buy: Enterprise Products Partners (EPD)
When it comes to MLPs, Enterprise Products Partners (EPD) is about as big as it gets. The midstream firms owns roughly 51,000 miles worth of pipelines — both onshore and offshore, NGL processing capacity, exporting terminals and even barges.
That size has continued to produce huge cash flows, which have translated into consistently growing dividends. EPD currently yields 4.8%.
But don’t get fooled. EPD is no slow-moving dinosaur. It continues to make deals that move the needle.
For instance, its $2.5 billion purchase of Pioneer Natural Resources (PXD) midstream assets in the Eagle Ford will provide about 780 million cubic feet per day of natural gas treating capacity as well as 119,000 barrels a day worth of condensate stabilization capacity. Condensate oil is one of the few petroleum products that firms can export from the U.S. and EPD already is leading the way on that front.
All in all, the buy will immediately help with EPD’s distributable cash flows.
And at a price-to-earnings ratio of 23, EPD seems reality cheap considering it’s the reigning MLP champion. The slight premium is worth it.
3 Big MLPs To Buy: Magellan Midstream Partners (MMP)
While EPD has an asset base covering the entire spectrum of fossil fuels, the focus of MLP Magellan Midstream Partners (MMP) is a tad bit oilier.
MMP features one of the largest networks of crude oil and refined oil midstream systems in the nation. In fact, the MLP owns the longest refined petroleum products pipeline system in the country. Roughly 50% of the nation’s refining capacity runs through its system at some point, and it stores 95 million barrels of gasoline, diesel fuel and crude oil.
Those assets are 100% fee-based and continue to help MMP raise its already strong dividend. MMP has raised its payout 447% since its IPO in 2001. Helping push that payout further has been a strong backlog of new oil-related storage and pipeline projects.
But things at boring and steady MMP are about to get even more exciting. The MLP is toying with the idea of adding an oil trading operation for the first time. And don’t think this speculative betting; oil trading helps mitigate MMP’s price risk with some of the oil it owns in its storage facilities. This supports its own midstream businesses.
That should really help move the needle on MMP’s 3.6% dividend.
3 Big MLPs To Buy: Plains All American Pipeline (PAA)
When it comes to midstream MLPs, Plains All American Pipeline (PAA) is a giant in the industry.
PAA owns and controls nearly 18,900 miles of crude oil and NGL pipelines and gathering systems as well as 125 million barrels worth of storage facilities — including one of the largest tank farms in Cushing, Oklahoma.
But it’s not just crude oil and natural gas liquids; PAA’s assets cover other energy commodities and logistics operations. It owns one of the largest fleets of tank cars, barges and trailer trucks in the business. This wide range of operating units has helped Plains’ weather the storms pretty well since going public back in 1998.
And PAA is certainly going through a storm right now.
About a month ago, one of PAA’s crude oil pipelines in California ruptured due to corrosion. This lead to a pretty bad oil spill — potentially over 100,000 gallons of oil. Not surprisingly, PAA stock has dropped about 8%.
However, this isn’t a BP (BP) Deepwater Horizon part two. The spill was contained and leak stopped quickly. So far, cleanup has been relatively cheap and the level of fines will not be even close to BP’s. In fact, PAA’s wide range of operations should help shield it from any real long term financial damage from the incident.
Which means, that the time could be right to buy the MLP and its 6.1% dividend.
As of this writing, Aaron Levitt was long MMP.