US Pipeline Profits: Steady Income In A Growing Industry…
It’s undeniable…
The US is undergoing a massive energy revolution. Ongoing advances in drilling technology are unlocking huge quantities of energy under US soil. In fact, according to the International Energy Agency (IEA), the US will surpass Saudi Arabia as the world’s number one oil producer by the year 2020.
What’s the best way to invest in this emerging trend?
One way is to buy undervalued small- and mid-cap oil exploration companies that are rapidly growing oil production in unconventional shale basins. Once investors realize that a particular company can turn production growth into bottom line profits, they’ll usually award it with a higher stock price. Synergy Resources (SYRG), Bonanza Creek Energy (BCEI), and Kodiak Oil & Gas (KOG) are perfect examples of this phenomenon.
But for each successful small cap oil company, there are at least ten that don’t cut it…
In fact, hundreds of small oil companies are growing production, but can’t translate the growth into bottom line profits. After all, unconventional oil exploration is an extremely costly endeavor. A few missteps and a company can find itself deeply in debt with nary a chance of profits.
As a result, investing in small cap oil companies can be a rather risky endeavor if you don’t know what to look for.
But there’s a better way to invest in the US energy revolution…
It’s much safer, more predictable, and best of all, pays you a hefty income stream while you wait.
What investment am I talking about?
… oil and gas pipelines.
You see, all this newly tapped energy doesn’t do us any good if there’s no way to get it from the field to the consumer. And without question, pipelines are the best way to transport petroleum products safely and efficiently from point A to point B.
Of course, companies owning these pipelines get paid handsomely for the service they provide. Each barrel passing through their pipeline has to pay a toll.
As you may know, pipeline companies are typically structured as Master Limited Partnerships (MLP). As long as the company passes on 90% of their income to shareholders, they attain a tax-free status with the IRS. As a result, pipeline MLPs pay investors hefty distributions (dividends).
But here’s where it gets interesting…
In many of the hottest US unconventional oil plays, like the Bakken shale of North Dakota, pipelines capacity isn’t nearly what it needs to be. In fact, under-developed pipeline infrastructure has much of the Bakken’s crude coming out via railcar, a relatively expensive option.
But companies like Enbridge Energy Partners (EEP) are aiming to solve this dilemma.
By 2016, Enbridge plans on completing six pipeline projects in North Dakota and surrounding states. Once completed, refiners will likely shift rail delivered Bakken crude to pipelines, as the latter should supply a hefty transportation discount.
The same thing is happening in other US shale basins…
Pipeline operators are working feverishly to supply additional takeaway capacity. For example, Regency Energy Partners (RGP) has pipeline growth projects worth over $1 billion underway in Texas and Oklahoma.
Since EEP and RGP pay hefty dividends (7% each), investors not only have substantial income opportunity, they also have a remarkable growth opportunity. With US pipeline expansion a near certainty, forward looking investors can pick up well-positioned companies and get paid handsomely to wait for growth.
Pipeline investments are simply a no brainier…
The US is slowly reducing its dependence on energy imports thanks to the ongoing oil and gas revolution. But for America to truly benefit from this resurgence, US pipeline capacity must be expanded dramatically.
As you can see, pipeline MLPs offer a great way to invest in this burgeoning trend!
Until Next Time,
Justin Bennett
Category: Commodities, Stocks
