Investors have become attracted to pipeline MLPs over the past several years. With the rapid build out of infrastructure to support the exploding growth in the oil and gas sector, MLPs are becoming more prevalent.
The attractiveness stems from high yields, and in many cases, growth in unit prices as well. Unfortunately, as retail investors have piled into the sector, some valuations have reached lofty heights.
Investing in pipeline master limited partnerships (MLPs) has become all the rage these days. With the continued expansion of horizontal drilling in America’s major oil and gas shale fields, pipelines to collect the hydrocarbons are in short supply.
The need for pipeline infrastructure will continue to grow as exploration and production companies bring more wells online. Oil and gas first travels through gathering pipeline networks.
From there, the hydrocarbons feed into midstream pipelines. These lines feed natural gas and crude oil processing plants.
Midstream pipelines also connect the processing plants to the large transmission pipelines that take natural gas to large distribution points. Crude transmission lines transport it to refineries on the east coast of the U.S. and the Gulf of Mexico.
Now the performance of some MLPs is coming under question. While MLPs were a great investment several years ago, some are coming under fire and prices are tanking as a result.
Take Boardwalk Pipeline Partners L.P. (NYSE:BWP) for example. Boardwalk has an extremely high exposure to natural gas.
Shares plummeted 50% when management slashed the dividend payout from $0.53 per unit to $0.10 per unit. In the past 52 weeks, units traded as high as $33.00. They now trade around $13.00 per unit.
The bottom line is this: investors need to do their homework concerning pipeline MLPs. Now let’s talk about the flip side of the coin when it comes to MLPs.
An MLP Positioned to Outperform its Peers for Years to Come
The first midstream pipeline MLP I like is Targa Resources Partners LP (NYSE:NGLS). Targa has a leadership position in the most active oil and gas basins in the U.S.
Targa has an extensive crude gathering network and processing facilities serving the Bakken shale formation. It also has a leadership position in the oil-rich Permian Basin and Barnett shale plays.
Its coastal gathering and processing serves both onshore and Gulf of Mexico wells in Louisiana. These assets are well positioned for upside potential in that area.
Mont Belvieu, Texas is the natural gas liquid (NGL) hub of North America. E&P companies are producing NGLs along with crude oil in the major shale fields in the U.S.
NGL flows to Mont Belvieu are expected to increase dramatically over the next several years. Several pipelines are in the process of being converted to bring additional NGL volumes to Mont Belvieu from the Utica/Marcellus shale fields.
That’s driving major capacity expansions at Mont Belvieu. Targa owns the second largest fractionation facility for NGLs at Mont Belvieu.
Targa also owns one of only two commercial NGL export facilities on the Gulf Coast. It’s linked via pipelines to Targa’s Mont Belvieu facilities. It would be very difficult to replicate Targa’s position in NGL processing, transportation and loading facilities.
In 2014, Targa expects to spend up to $2 billion on increasing pipeline capacity to support the major U.S. shale plays. It also plans to expand its fractionation plant at Mont Belvieu.
Finally, Targa is increasing connectivity to end users of NGLs. It’s also expanding export services for liquid propane gas (LPG) at its Galena Park terminal facilities.
Targa expects to grow its dividend 7-9% in 2014. Targa currently yields 5.38%.
Over the last year, Targa units have appreciated 20.7%. Targa Resources Partners LP is a great growth and income MLP for investor’s energy portfolios. In my premium service, ‘Wealth from Power’, I look at plays like these and most importantly, when to TIME the buying just right.
Profitably yours,
Peter Fallon.
Note from Midas Legacy Editor: Peter retired in his early 50’s after a successful career in the fields of energy and technology. His success as an investor and business owner spans over 40 years, and he has now combined his experience with his knowledge and passion for energy, technology, and investing. He is also the editor of our energy stocks recommendation service, ‘Wealth from Power’, available by invitation only.
