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Best of the Midstream Master Limited Partnerships

Thursday - 5/23/2013, 4:13pm  ET

MLPs are the most stable way to get exposure to the U.S. energy boom in natural gas and oil. Master Limited Partnership pipelines are not exposed to the commodity prices and typically come with outsized dividends. However, MLPs come with special tax considerations too; you should consult a tax specialist before you purchase an MLP.

Commodity prices

Companies like ExxonMobil and Chevron are linked to the underlying commodity prices, and tend to trade with the price of oil and natural gas. MLPs, on the other hand, make their money depending on how much volume is run through their pipeline network. Kinder Morgan Energy Partners is much more like a toll-road in that respect, it doesn’t matter if the car driving on it costs $50,000 or $5,000, each car pays the same price. This gives these stocks more stability than other companies in the industry.

Kinder Morgan keeps expanding its reach. In January, Kinder Morgan said it will acquire Copano for $5 billion, including the assumption of debt. Kinder is also realizing more cost savings from the El Paso purchase than it had originally estimated. The most recent purchase of Copano will give Kinder Morgan more exposure to natural gas and processing. During the first quarter conference call, Kinder Morgan expects to spend at least $7 billion in capital projects that will help support its long term 8% distribution increase target.

Tax advantage

A limited partnership doesn’t pay taxes on its profit, it is taxed when the unit holders receive distributions. As the yield on municipal bonds remain low, yield hungry investors can turn to MLPs to take their place as the tax advantaged investment of choice. The business of moving hydrocarbons is now booming in America, and these companies are benefiting handsomely.

Cost and safety

Pipelines are in high demand, especially in the Dakotas, where they are currently shipping oil and compressed natural gas by truck and train. Once the pipes are laid, pipelines are the most efficient way to move these resources. As more of these pipelines come online, these companies will be able to process and export the product to the gulf where it can be sold internationally at global prices.

Using pipelines to transport hydrocarbons is the safest and most consistent way to move these products. With the recent rupture of an ExxonMobil  pipeline in Arkansas, safety is a renewed concern. Kinder Morgan still remains a leader in accidents per mile of pipeline.

Yield

Enterprise Products Partners has increased distributions to its unit holders for 35 consecutive years, the longest of any partnership. Enterprise Products also has more exposure to processing and export facilities than than Kinder Morgan, but has a slightly lower yield at 4.40%. As more pipes are laid leading to its export terminals in the gulf, we will see distributions continue to rise in tandem with volumes.

Currently, Enterprise Partners has outlaid $7.5 billion for new expansions between now and 2015. These pipelines will boost volumes going to the gulf plants from the Eagleford Shale region in Texas.

ExxonMobil has been increasing its exposure to natural gas by purchasing production assets in the U.S. Exxon realizes that a mixed revenue stream that allows it to take advantage of shifting supplies allows it to stay a relevant company in the future. Exxon currently has operating margins of 13.7% and pays out 23.2% of earnings to support a 2.70% dividend.

Foolish bottom line

Kinder Morgan has a monster yield of 5.80% and great management team with Rich Kinder at the helm. Its 80,000 miles of pipe and 180 terminals will allow it to stay relevant in the energy industry for decades to come. Kinder Morgan purchased El Paso for $21 billion and created the largest natural gas pipeline operator in North America, and will keep rewarding shareholders as natural gas volumes increase.

The growing production of natural gas from hydraulic fracturing and horizontal drilling is flooding the North American market and resulting in record-low prices for natural gas. Enterprise Products Partners, with its superior integrated asset base, can profit from the massive bottlenecks in takeaway capacity by taking on large-scale projects. To help investors decide whether Enterprise Products Partners is a buy or a sell today, click here now to check out The Motley Fool's brand new premium research report on the company.

This article was originally published as Best of the Midstream Master Limited Partnershipson Fool.com

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