In many respects, pipelines are great businesses for patient investors who like collect to dividends. They allow investors to leverage the growing demand for energy with far less exposure to commodity prices than is the case for integrated energy companies or exploration and production companies. Instead, they act as toll collectors with very little operating risk on a week to week basis.
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The nature of the business also gives certain inherent advantage to these companies. It takes a great deal of capital to build networks of pipelines, terminals, storage facilities and the like, but once they are in place there is seldom much competition for their services. What's more, because the tax-advantaged MLP structure is so common in the space, these companies often pay substantial dividends (technically called distributions in most cases). (For more, see Power In Pipelines.)
It is not all perfect in the industry, though. Because companies that opt for the MLP structure cannot retain any significant amount of their earnings, these companies must borrow extensively to meet their capital needs. So while these companies have clearly benefited from the low interest rate environment (which has also made the yields on these stocks quite attractive), the risk of higher rates is particularly significant here. That is all the more relevant when considering the fact that many companies are looking to expand their networks to better access areas like the Bakken and Marcellus Shales.
Investors also need to keep in mind that there are a lot of rules and regulations that go with these companies and stocks. Many of these companies operate in highly regulated environments and while regulators have been pretty industry-friendly with tariffs and rates, that can change. Investors also need to remember that ownership of MLP units creates certain complications with personal tax filings - nothing that is insurmountable, but still perhaps more hassle than some investors want. (For more, see Doing The MLP Dividend Dance.)
The table below includes some basic information on a selection of pipeline companies. Just to add a bit of variety and perspective, two midstream companies have been added to the mix as well.
|Name||Ticker||Price||Yield||Net Debt / Capital||EV / EBITDA|
|Buckeye Partners, LP||NYSE:BPL||$64.00||6.1%||45.4%||21.6|
|Boardwalk Pipeline Partners, LP||NYSE:BWP||$32.84||6.4%||33.2%||14.5|
|Crosstex Energy LP||Nasdaq:XTEX||$17.01||6.3%||42.5%||8.8|
|Magellan Midstream Partners, LP||NYSE:MMP||$59.06||5.2%||24.3%||16.6|
|ONEOK Partners, LP||NYSE:OKS||$82.12||5.6%||32.1%||15.5|
|Plains All American Pipeline, LP||NYSE:PAA||$63.33||6.1%||37.3%||14.5|
Odds and Ends
Buckeye Partners makes its money from transporting refined products, and roughly 50% of its volume is in gasoline. By comparison, Plains All American has built itself up by using its 20,000 miles of pipelines to supply Midwestern refineries with crude. Along similar lines, Magellan Midstream's network is leveraged to liquids transport and connects to about 40% of the United States' refining capacity.
Boardwalk operates three systems that connect to major energy development areas like the Barnett, Haynesville, Fayetteville and Eagle Ford. Interestingly, Boardwalk is not really levered to volume - about three-quarters of the company's revenue is covered by fixed contracts. In contrast, ONEOK is much more levered to regions like the Mid-Continent, Wyoming, Montana and North Dakota. Investors looking for a less U.S.-centric play can also consider Transcanada with its extensive Canadian pipeline network and over 11,000 megawatts of power generation capacity. (For related reading, see Nuclear Energy - The Emotion Trade Is In Full Swing.)
The Bottom Line
This entire sector has done well since late 2008, and there do not seem to be too many bargains left. Moreover, there is the risk that as interest rates rise (whenever that may happen), the fast money will leave this sector behind to go yield-shopping elsewhere. Investors looking to mitigate some of the risk might want to consider an idea like Tortoise Energy Capital (NYSE:TYY) - a closed-end fund that owns a broad portfolio of MLPs and pays out dividends in a fashion that creates fewer headaches for individual investors and their tax returns. (For more, see Eye-Bulging Yields On These MLPs.)
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