Between the worlds of oil and gas producing companies and oil and gas refining and retail companies are a handful of midstream oil and gas companies; essentially pipeline companies. I have some real issues with these companies right now, thus the purpose of this article. I will focus on TransCanada (TRP), Enterprise Products Partners (EPD), and Plains All American (PAA), to see which ones offer the best investment opportunities right now.
TransCanada is one of the west's largest pipeline companies with a market capitalization of about $30 billion, and 2011 sales of a little over $9 billion. It divides itself into three separate groups; oil pipeline, gas pipeline, and energy. All its tangible assets are in North America.
Transcanada's big concern is whether it will ever receive approval from the United States to construct its massive $7 billion (or likely, more) Keystone XL oil pipeline from western Canada's oil sand fields to refineries along the Texas Gulf Coast. It all makes some sense, until one realizes what the increased development of tar sands means not just for Canada, but for the United States as well. Perhaps the fact that the United States as a whole just completed the warmest first half of the year in recorded history makes the point that oil sands are environmentally indefensible. Study after study has shown that the environmental impact of tar sands is far more carbon intensive than any other form of drilling, and that the energy needed to process the tar sand makes it hardly worth the effort.
Which brings us to the second issue. The oil sands will be developed, quite possibly to the detriment of the Canadian economy. It will either head south via Keystone, or head west, over (or through) the Rocky Mountains to sea ports on the Western shores of British Columbia via Enbridge's (ENB) proposed pipeline for shipments to Asia. Enbridge is also a large Canadian based pipeline company with a market capitalization of just over $30 billion and about $20 billion in revenues last year.
But of late, neither of these companies has been shown to be capable of piping oil safely. There have been a myriad of spills in Alberta in recent months. And Enbridge is responsible for the largest inland oil leak in United States history in 2010 near Marshall, Michigan. At that time over 800,000 gallons of crude oil leaked into the Kalamazoo River upriver from Battle Creek. The investigation has turned out that Enbridge knew of corrosion in the affected pipe more than five years prior to the leak. In addition to the $800 million Enbridge has paid to clean up the area thus far, it just received the steepest penalty ever levied by the National Transportation Safety Board, $3.7 million.
Into this mess, the U.S. House of Representatives recently passed an omnibus transportation funding bill, which excluded the Keystone project. Out of moral grounds, I cannot invest nor recommend to others to invest in these two Canadian oil pipeline giants. Things look a little better south of the border. In the United States, pipeline companies are typically set up as master limited partnerships, which under tax laws must pay at least 90% of their profits to the limited partners (shareholders) each year. Thus, these are among the highest paying dividend companies listed on the stock market.
Enterprise Products Partners is the largest domestic pipeline company, with a little over $44 billion in revenue last year. Through its pipelines run gas, oil, and refined products, and those pipelines are located throughout the United States and Canada. It owns about 51,000 miles of pipeline overall, as well as about 14 billion cubic feet of natural gas storage space. Its $3.5 billion capital budget places it 15th on a list of the 25 non-financial companies investing the most in America. The company is an utter dividend champion, though it has not been around long enough to be a long term dividend payer, it has raised its dividend at least annually since 1998. Even better, it has raised the dividend amount each and every sequentially linked quarter since the third quarter of 2004. That makes for 31 consecutive quarters of dividend growth. I do not know of another company that can match that. The big recent news from the company is the completion of its 50% interest in the Seaway Pipeline, whose flow has been reversed to move oil from the congested Cushing, Oklahoma pipeline hub down to south Texas refineries.
The company beat analysts' expectations each of the past four quarters, and the recent increase in natural gas prices and usage in this country will make for excellent earnings again this year, I believe. The current yield is 4.8%, though I have every expectation that the quarterly distribution will continue to rise. This is a winning company, as evidenced by analysts' mean rating of 1.7, and a five year PEG of 0.90. There is never a bad time to buy into a quality company, and with the current yield over three times the ten year treasury, Enterprise is a great fit for income seekers.
Plains All American is also a first rate limited partnership. It operates all manner of midstream services, owning hundreds of trucks and railcars, as well as 13,000 miles of pipeline and dry gas storage space.
It also is benefiting from a surge in America's use of natural gas and increased oil recoveries, with its net income beating analysts' estimates each of the last four quarters. It has raised its annual distribution total every year since 1999, and has also raised its quarterly distribution amount the last twelve quarters. That quarterly amount now stands at $1.065, for an indicated annual distribution of at least $4.26, for a yield of 5.1%. As I am confident revenues, cash flow and profits will continue to climb due to increasing domestic oil drilling, that distribution amount is very likely to continue to increase. This is a terrific situation for income seekers.
I also wanted to touch briefly upon one other midstream limited partnership today, Energy Transfer Partners (ETP). It is smaller than Enterprise or Plains, with trailing revenues of about $10 billion. It is also a little older a company, having started as a local pipeline company in 1995. Its dividend yield stands at 8%. But that dividend amount has not changed for nearly four years. I would rather take on a company with a growing dividend even over a higher yielding company with a static dividend. The company also is paying its dividends out of cash flow, and not out of profits. The 2011 distribution was about 3x the company's profits.
My choice among these large domestic midstream partnerships is Enterprise, both for the breadth of its assets as well as the dividend record.