In the last 10 years MLPs have matured, becoming a major industry in the U.S. Their units (not shares) have become a leading choice for investors who are attracted to a record of growth and high yields. Over the last 10 years, the Alerian MLP Index (AMZ) increased from 168 to 374. The comparable index which includes reinvested income has an enviable record, growing from 263 to 1122. Meanwhile the yield fell from 7.6% to 6.3%. In the last 10 years, the Dow is up only 18% and many of the finest companies have lower stock prices.
The MLP index sold off badly in the 2008-9 recession. Between the middle of 2007 and November 2008 the index dropped an astounding 55%, causing the yield to skyrocket from under 6% to over 16%. In 2009 and 2010 the index had a spectacular rise, doubling in 2 years bringing the yield back down to 6.2%. 2011 has been a tough year for stock market, but the MLP index is up 3% and the comparable index with reinvested income is up almost 10%. Below are charts for AMZ and Dow:
AMZ --- 2 years
Dow Jones --- 10 years
Increased prices for units of MLPs resulted from consistent growth. Most have expanded pipelines and storage terminal capacity for gas and oil. Their businesses operate like a toll road, receiving fees for transporting, storing and handling energy products such as natural gas, refined petroleum, crude oil and similar products. Customers include producers, shippers, oil companies and utilities. Expansion for the nation's energy infrastructure is expected to continue for the foreseeable future.
There has been no shortage of investments to expand energy infrastructure. But new technology and discovery of major shale formations are making the business of MLPs more exciting. An emerging form of unconventional gas is a growing importance to North American energy supply and by the end of this decade could account for over 30% of natural gas production in Canada and the lower 48 states. Oil (from shale) has been transported to the U.S. from Canada for decades, making Canada the largest foreign supplier of oil.
With new technology and the discovery of massive shale plays in the US, the supply of natural gas far exceeds current demand which has caused the price of gas to fall sharply in recent years. Abundant resources suggest that the price of gas will be less volatile than oil and will remain low for some time. This stability has led to an increase in coal-to-gas switching at power plants. In some areas it has become more economical for generators to use lower-cost gas units over coal-fired units.
4 large MLPs are investing to support new energy supplies from shale formations:
- Boardwalk Pipeline Partners (NYSE:BWP)
- Enbridge Energy Partners (NYSE:EEP)
- Enterprise Products Partners (NYSE:EPD)
- Kinder Morgan Energy Partners (NYSE:KMP)
BWP along with Southwestern Energy Company (NYSE:SWN) announced in October a 15-year gas gathering agreement which requires building a $90 million natural gas gathering system in Susquehanna and Lackawanna Counties, Pennsylvania. The system will be comprised of 26 miles of 12" high pressure gas pipeline in Susquehanna County, Pennsylvania. The system will be built over several years and the company looks forward to expanding its relationship into the Marcellus Shale. The unites are $27.60, yielding 7.6%.
EEP will invest $145 million to expand its Berthold Rail terminal capacity in the Bakken shale and include a rail car loading facility for additional volume. Already EEP has commitments for 70% of the rail loading capacity. The project includes construction of a facility, crude oil tankage and other facilities adjacent to existing facilities near Berthold, North Dakota and will enter service in early 2013. In addition, EEP will to add takeaway capacity from the Bakken and Three Forks formations in Montana, North Dakota, and southeast Saskatchewan. The Bakken Expansion will cost about $370 million for the U.S. projects and $190 million for the Canadian projects. The company will invest another $90 million Bakken Access Program to increase gathering pipeline capacities and additional storage tanks to supply the Bakken Expansion. The units are $30.70, yielding 6.9%.
Kinder Morgan Inc. (NYSE:KMI) will acquire El Paso Corporation (EP) next year. KMI is the general manager for Kinder Morgan Partners (KMP), one of the largest MLPs in America, and Kinder Morgan Management (NYSE:KMR), with pipelines that transport natural gas, gasoline and crude oil. KMP has 23,000 miles of natural gas pipelines and El Paso has more than 43,000 miles of pipeline. One major benefit of the deal is that it will broaden ability of KMP to transport gas from some of the largest shale plays in the country, such as the Marcellus, Utica and Barnett shales, to areas where natural gas-fired generation is in high demand, particularly in the California and Florida markets. The units are $79.31, yielding 5.9%.
In November, EPD announced construction of projects to extend and expand its natural gas and natural gas liquids (NGL) infrastructure in South Texas to accommodate expected production growth from the Eagle Ford Shale play. Because of additional demand from the Eagle Ford producing customers, EPD will build an additional 300 million cubic feet per day ("MMcf/d") train at its Yoakum natural gas processing facility in Lavaca County, Texas. In addition, EEP is constructing 62 miles of pipeline loops to gather and transport additional rich Eagle Ford Shale gas. This expansion is expected to begin service in Q1 2013. EEP is currently the largest MLP provider of midstream energy services to consumers of natural gas, NGLs, crude oil, refined products and petrochemicals. EPD has 50,000 miles pipelines; 192 million barrels of storage capacity for NGLs, refined products and crude oil; and 27 billion cubic feet of natural gas storage capacity. The units are $44.90, yielding 5.5%%.
These are examples of investment opportunities in MLPs with excellent charts during a difficult 10 years in the stock market. In addition, the yields are some of the highest available today. However, there is some tax hassle along with additional record keeping involved. For those who are intimidated by K-1 tax forms, there are stock alternatives with no tax fuss. Enbridge and Kinder Morgan each have a corporation (EEQ and KMR respectively) which pay stock dividends based on distributions and track price movements of the MLP units. 1099's are not issued for stock dividends. Additional investments by MLPs are key for future growth, highlighted by excitement created from newly discovered shale formations. 2012 will be another great year for these MLPs.
Disclosure: I am long EEQ.