Our Seven-Step MLP Selection Model has helped us assemble an elite portfolio of the oil, natural gas, and NGL processors, producers, and transporters that are best managed to create long-term shareholder value and rising cash distributions. Their services are instrumental to the success of the American energy boom.
So if the American energy boom is such a big trend, why are we shying away from new recommendations? Because we've seen more than one boom turn into a bust...
In the "Nifty Fifties", the stock boom crashed. Some stocks were down 90% from the late 1960s through 1974. The Internet boom of the late 1990s crashed, and the Nasdaq has yet to regain its all-time high. The housing boom of the mid-2000s nearly crashed the global financial system, and its effects are still being felt among today's unemployed. We're not forecasting a big bust in the energy patch today, but we do think it's time to wave the yellow flag.
Why It's Time to Be Cautious of New MLPs
If you've ever watched the Indianapolis 500 auto race on TV, you've heard them say, "The yellow caution flag is out." It means the cars are still moving around the track, but the race is on hold.
This month, I'm putting the yellow caution flag out for MLPs.
What does this mean for us?
First, let's make clear what it doesn't mean: We do not recommend selling our MLPs. Our MLPs are a cut above most others. We've put them through our rigorous Seven-Step MLP Selection Model, so we know they have a superior ability to consistently grow cash distributions and shareholder value. And we've been conservative about setting maximum buy prices to keep risk low.
We're not selling our MLPs. But we're not likely to recommend any new ones for a while.
The main reason we're cautious about MLPs right now is interest rates. The 10-year U.S. Treasury yield is used in the income investment world as a key benchmark. When it goes up, MLP prices tend to fall. We don't like to recommend new MLPs at spreads of less than 4% over U.S. Treasurys. When the spread is too narrow, it means we're not getting paid enough income to compensate for the higher risk of MLPs versus Treasury bonds. So investors sell MLPs, pushing share prices down.
The 10-year yield was 1.6% in May. Now, it's 2.5%. That's a big move in a short time. It's pushed most MLP share prices down since May, and made most of their current yields less attractive.
Second, as contrarians, we don't like it when the majority of experts get too optimistic (or pessimistic) about a trend. Right now, most energy experts expect rapidly rising production of crude oil, natural gas, and NGLs to continue through at least 2016. We heard this story from every RBN consultant last week and from each of the energy experts who spoke at a Bakken energy conference we attended back in March.
We saw the results of expanding production first-hand in Mont Belvieu and a suburb north of Houston called The Woodlands. Oil and gas explorer Anadarko Petroleum is close to finishing a twin 31-story office tower in The Woodlands. And some 15 construction cranes tower over what will soon be ExxonMobil's new 385-acre global headquarters.
Industry experts see nothing but wonderful things ahead. That makes us cautious. It's a classic financial mistake to look at the recent past and project it into the future. Energy investors could be doing so today.
I'm not predicting bad things will happen. I'm just being cautious. All booms end. I can't tell you when or how the boom will end, but it will end. I only know this: MLP prices are higher than a few years ago, and their yields are much lower. MLP cash distributions rose about 9% over the last year, but share prices rose 26% (using the ALPS Alerian MLP Fund as an industry proxy). Income investors are probably paying too much for future MLP growth today.
Thanks to our conservative buy-up-to prices, we got into our MLP positions at cheap prices. We're now sitting on solid gains for most of them. And there is still plenty of potential for high, consistent income in each. We won't sell them. But now is not the time to add new positions to our portfolio, either. Now is the time to sit back, collect your income, and mind your trailing stops.
So now let's take a look at what we can expect from each of our existing MLP recommendations.
How to Invest in the Safe, Steady and Growing Income
As said, pipeline operators ONEOK Partners, Energy Transfer Partners, and Enterprise Product Partners are the three biggest NGL players in Mont Belvieu. They're also integral to the transportation, storage, and processing of oil, natural gas, and NGLs from liquid-rich shales across the country...
Three regions in the U.S. are producing massive amounts of crude oil and natural gas liquids: The Marcellus Shale in western Pennsylvania, the Eagle Ford Shale in southern Texas, and the Bakken Shale in North Dakota.
Moving NGLs from these three areas is a primary. Nearly every MLP we've ever recommended produces, processes, stores, or transports oil, gas, or NGLs from one of these three massive shale regions – often straight to Mont Belvieu. The folks at RBN say U.S. NGL production will grow by 1.6 million barrels per day from 2012 to 2018. They expect 1.1 million barrels of that increase to flow to Mont Belvieu, creating the need for new processing and pipelines... a need that's being met by almost all our recommended MLPs.
Let's start with the three major players at the "center of the universe".
ONEOK Partners (NYSE: OKS)
ONEOK Partners is based in Tulsa, Oklahoma. It does much of its business there, as well as in Texas, Kansas, North Dakota, and Colorado.
ONEOK specializes in three related businesses: natural gas gathering and processing, natural gas pipelines, and NGLs. It's one of the biggest U.S. companies in all three businesses, with an enterprise value of $15.8 billion.
Of the three, NGLs are ONEOK's biggest business and its biggest source of growth. NGLs were less than 20% of ONEOK's business in 2006. Today, they're more than 60% and still the fastest-growing part.
ONEOK Partners has 10 storage wells in Mont Belvieu, with total storage capacity of 13.75 million barrels. It also has two NGL fractionators operating there and is building a third. Its total estimated 2014 fractionation capacity in Mont Belvieu is 275,000 barrels per day. That's 16.9% of the total fractionation capacity in the area.
Roughly 20% of ONEOK's new growth spending – $1 billion – is targeted for Mont Belvieu. ONEOK has one natural gas distribution pipeline in the Eagle Ford region. But its largest presence is in the Bakken Shale...
The Bakken Shale covers nearly the entire Williston Basin region of North Dakota and Montana. This is a major area of investment for ONEOK. The company has dedicated $5.2 billion to growth projects and expansions through 2015. About half of that will take place in the Williston Basin region.
ONEOK just completed its $600 million, 600-mile, 12-inch Bakken NGL pipeline in April. It's got an initial capacity of 60,000 barrels per day. ONEOK will invest $100 million on additional pumping stations to increase the pipeline's capacity to 135,000 barrels per day. This is the first pipeline ever to transport NGLs from the Williston Basin to key market centers in Conway, Kansas and to the Gulf Coast (through connections with other pipelines).
The company announced another $500 million of investment in January. Most of that will be used to build a natural gas processing facility in North Dakota near the Bakken Shale.
ONEOK is the largest independent operator of natural gas gathering pipelines and processing plants in the Williston Basin. It owns natural gas gathering and processing pipelines in several major shale plays, including the Bakken, Eagle Ford, and Marcellus. Gathering pipelines are important because they carry NGL-rich gas to processing facilities. ONEOK will also build a 95-mile NGL pipeline between Kansas and Oklahoma.
ONEOK is trading for less than nine times distributable cash flow. That's really cheap. The most we would want to pay for an MLP is 10-12 times distributable cash flow. It's trading at a current yield of roughly 3% above the 10-year U.S. Treasury yield. We prefer 4% or higher. But OKS is so cheap, it makes up for the smaller spread over Treasury yields. MLPs don't normally get that cheap. ONEOK Partners is a bargain here.
BUY ONEOK Partners (NYSE: OKS) up to $57 a share. Right now, shares trade around $50 per share.
Enterprise Products Partners (NYSE: EPD)
Enterprise Products Partners is the largest publicly traded energy partnership in the U.S., with an enterprise value of more than $70 billion. It operates one of the largest pipeline networks in the country...
EPD gathers, stores, processes, and transports natural gas, crude oil, and natural gas liquids. It owns an "integrated system," which means it has export and import facilities, pipelines, processing plants, storage tanks, and gathering equipment. The system links the largest supply basins in North America, including the Gulf of Mexico, Texas, and Wyoming.
The company's annual report clearly states its intention to pursue growth opportunities in all three of the key regions we've identified – the Bakken, the Eagle Ford, and the Marcellus.
When Mike and I visited Mont Belvieu last week, we stopped at EPD's office for a short presentation before touring the area by bus. EPD is the biggest NGL business in Mont Belvieu. NGLs make up 53% of its gross profit and 45% of its five-year capital spending plans. (The rest is oil, chemicals, refined petroleum products, and natural gas.) It spent $644 million on new Mont Belvieu growth projects last year, and it expects to spend another $400 million on them this year.
Enterprise owns 36 storage wells in Mont Belvieu, with 128 million barrels of storage capacity. We rode past several Enterprise fractionation towers – some operating, some under construction. Most of the construction cranes we saw in Mont Belvieu were on Enterprise property. Next to existing fractionators was a large, flat, open piece of land the Enterprise representative told us would be home to even more fractionation capacity. So there are more cranes in Enterprise's future.
EPD's total estimated 2014 NGL fractionation capacity is 610,000 barrels per day. That's 37.4% of the total fractionation capacity in the area – more than any other company. EPD has a big presence in Mont Belvieu. But it's got a lot going on in the Eagle Ford, too...
EPD's combined 2012 and (estimated) 2013 growth budget is $7.8 billion. It expects to spend $1.9 billion – nearly one-fourth – of that on the Eagle Ford over the period. That's a lot for a huge company that does business all over the country. The Eagle Ford is obviously a big focus for EPD.
EPD's new Yoakum, Texas natural gas processing plant in the Eagle Ford can process 700 million cubic feet per day and produce 90,000 barrels of NGLs. That's roughly two to three times the capacity of our other recommendations' processing plants. EPD also built a 168-mile NGL pipeline to transport Eagle Ford NGLs to Mont Belvieu.
EPD's South Texas natural gas gathering system has 648 miles of pipeline. Its South Texas crude oil system carries oil from South Texas, including the Eagle Ford, to refineries in the Houston area. EPD added an expansion pipeline last year, with a capacity of 350,000 barrels per day and 2.4 million barrels of storage to serve the Eagle Ford region. The new pipeline is 147 miles long and includes 2.4 million barrels of oil storage.
EPD and Plains All American Pipeline L.P. are in a 50/50 joint venture to build another 350,000-barrel-per-day pipeline, 1.8 million barrels of oil storage in the Eagle Ford, and a marine shipping terminal in Corpus Christi, Texas. The joint venture has 210,000 barrels per day of supply commitments from oil producers in the Eagle Ford.
EPD is up 238% since we recommended it in 2008. It's trading for more than 20 times distributable cash flow and is at a current yield of roughly 1.7% above the 10-year U.S. Treasury yield. That's a higher distributable cash flow ratio and a lower Treasury yield spread than we like to see. EPD is a hold.
HOLD Enterprise Products Partners (NYSE: EPD).
Energy Transfer Partners (NYSE: ETP)
Energy Transfer Partners is a major pipeline operator, with an enterprise value of nearly $36 billion. It has $15.5 billion in assets and a market cap over $10 billion. ETP wholly or partially owns and operates 23,500 miles of natural gas and natural gas liquids pipelines in the Northeast, Midwest, and Gulf Coast regions of the U.S. It also owns natural gas storage and distribution terminals and natural gas processing facilities.
ETP has no presence in the Bakken Shale but it has a major presence in Mont Belvieu and the Eagle Ford Shale. And it owns pipelines in the Marcellus region through its controlling stake in Sunoco Logistics Partners (SXL)...
ETP recently completed its 570-mile Lone Star Texas Gateway NGL pipeline project, which included a 200 million cubic-foot-per-day natural gas processing plant. ETP also recently completed its 130-mile Justice NGL pipeline, which carries NGLs from its Jackson County, Texas processing plant to Mont Belvieu. The two pipelines together can carry NGLs from the Eagle Ford Shale region of southern/central Texas to the Gulf Coast.
Lone Star – ETP's 70%-owned NGL subsidiary – owns one 100,000 barrel-per-day fractionator in Mont Belvieu. It expects to complete a second one by the middle of next year. It spent $390 million on the first one, and it'll spend about $350 million on the second one. When the second fractionator is done in 2014, Lone Star's estimated capacity will be $200,000 barrels per day. That's about 12% of fractionation capacity in Mont Belvieu. Not bad, considering it accounted for 0% of it two years ago.
ETP's Rich Eagle Ford Mainline pipeline system is a 220-mile natural gas gathering pipeline that moves 1 billion cubic feet per day of natural gas. It connects with ETP's Chisolm pipeline to deliver gas to ETP's processing plants.
Sunoco Logistics has two major projects in the Marcellus Shale: Mariner East and Mariner West. Both projects originate in Houston, Pennsylvania, in the heart of the liquids-rich Marcellus. This is perhaps the most NGL-rich shale in the country. Both Mariner projects make use of existing pipelines, modified to carry NGLs.
Mariner East is a pipeline and marine terminal that will deliver 70,000 barrels per day of ethane and propane from the Marcellus Shale to the Marcus Hook storage and transportation terminal, with access to East Coast shipping by water, rail, and truck. Mariner West is a pipeline that will initially carry 50,000 barrels per day of ethane from the Marcellus Shale to petrochemical markets in Sarnia, Ontario.
ETP is trading for 13 times distributable cash flow. We usually only like to buy stocks trading between 10 and 12 times distributable free cash flow, but I'm willing to stretch the price a bit for such a high-quality MLP. ETP's trading at a current yield of roughly 4.3% above the 10-year U.S. Treasury yield.
BUY Energy Transfer Partners (NYSE: ETP) up to $52 per share. Shares have been swinging above and below our buy price recently. If it's above $52 when you read this, be patient. Do not pay one penny more than $52 per share.
Kinder Morgan Management (NYSE: KMR)
Kinder Morgan is the third-largest energy company in America, with a total combined enterprise value of over $110 billion. It's got assets in or near most of the major hydrocarbon-producing regions in the country, including the Bakken, Marcellus and Eagle Ford Shales.
We recommended KMR last month as a way to enjoy all the benefits of an MLP in your retirement account without any of the tax headaches... KMR's only holding is special shares of Kinder Morgan Energy Partners (KMP). KMP pays a distribution to KMR. KMR shareholders receive those distributions in the form of more shares rather than cash. KMR is essentially a dividend reinvestment plan for KMP. The company has a strong presence in all three of the major hydrocarbon-producing regions in the U.S...
KMR's Cochin NGL pipeline from western Canada to Illinois will reverse its flow, to deliver light condensate from Illinois to Alberta, Canada. (Crude oil can be thick, black muck, like mud... or light, like vegetable oil. When it's really light, it can no longer be used as "crude oil," and it's called "condensate.") The light condensate will be used to dilute heavy Canadian oil, so it can be shipped by pipeline to refineries. The project will cost $260 million and includes the construction of a 1 million barrel storage facility in Illinois. The pipeline moves through the Bakken Shale region, and is Kinder Morgan's only presence in that area.
KMR's Tennessee Gas subsidiary is a 13,900-mile natural gas pipeline system connected to major shale regions, including the Marcellus, the neighboring Utica Shale in Ohio, and the Eagle Ford. Tennessee Gas recently added 245 million cubic feet per day of natural gas pipeline from the Marcellus Shale to New England and Niagara Falls. Kinder Morgan's $86 million Marcellus "Looping" project was approved last December. That will add another 240 million cubic feet per day of natural gas transportation from the Marcellus Shale. Kinder Morgan's $450 million Northeast Upgrade project will add 636 million cubic feet per day of additional natural gas pipeline capacity out of the Marcellus.
KMR recently started transporting 300,000 barrels per day of oil and condensate 174 miles from the Eagle Ford Shale to the Houston Ship Channel.
KMR will build a $200 million condensate-processing facility near its existing Galena Park terminal on the Houston Ship Channel. It'll start at 50,000 barrels per day, expandable to 100,000 barrels per day. That's several times what some of global oil and gas giant Chevron's plants produce.
KMR already has major oil and gas company BP committed and under contract, and it expects to get more customer commitments for more expansions at the facility. The Kinder Morgan Crude and Condensate Pipeline extends 175 miles from the Eagle Ford to a storage facility serving refineries in the Houston Ship Channel area.
KMR spent $142 million to buy 42 acres of land so it can build a new ship dock connected to its Galena Park Terminal in the Houston Ship Channel, including 1.4 million barrels of storage tanks. It bought another 20 acres next to its Pasadena terminal for a future crude-condensate shipping and storage terminal, with 1.2 million barrels of storage. It will also build a new barge dock to help relieve congestion.
KMR owns the Camino Real natural gas and oil gathering pipeline system in the Eagle Ford. It also owns 25% of EagleHawk Field Services and 50% of Eagle Ford Gathering, providing natural gas and condensate gathering, processing, and transportation in the Eagle Ford.
KMR is trading for roughly seven times distributable cash flow. That's dirt-cheap. But at today's price, it's trading at a current yield of roughly 3.5% above the 10-year U.S. Treasury yield. When it drops back into range, we recommend you.
BUY Kinder Morgan Management, LLC (NYSE: KMR) up to $83 per share. Right now, shares trade for around $84.
DCP Midstream Partners (NYSE: DPM)
DCP Midstream Partners and its subsidiaries own or operate 61 natural gas processing plants, 12 natural gas fractionation plants, and nearly 63,000 miles of natural gas gathering and transmission and NGL transmission pipelines.
DCP Midstream operates in 26 U.S. states. It's also one of the largest wholesale propane suppliers in the Northeast and Mid-Atlantic.
The company has no Bakken presence and just two storage facilities in the Marcellus region. But the Eagle Ford is a very important region for DPM...
DPM owns 80% of an Eagle Ford joint venture company. Its general partner, DCP Midstream, LLC, owns the other 20%. The joint venture owns five natural gas processing plants with a capacity of 760 million cubic feet per day... 6,000 miles of natural gas gathering pipelines; three fractionators with 36,000 barrels per day capacity... over 300,000 acres of production under long-term agreement and a three-year commodity price hedge provided by DCP Midstream, LLC.
The joint venture is building a 200 million cubic feet per day processing plant in Goliad, Texas, just northeast of the Eagle Ford. DCP Midstream LLC provided a 27-month direct commodity price hedge contract.
The Eagle Plant natural gas processing facility in Jackson County was completed and in service in March 2013. It can process 200 million cubic feet per day. The plant delivers NGLs to the Gulf Coast chemical plants and to Mont Belvieu. It will soon be able to deliver natural gas (the gas left over after extracting NGLs) to William Partners' Transco pipeline.
DPM is up 25% since we recommended it 10 months ago. So it's too expensive to buy right now... It's trading for 27 times distributable cash flow and is at a current yield of roughly 2.5% above the 10-year U.S. Treasury yield. If shares continue to rise, we'll likely move the stock to a "hold." But if it drops back into range, we recommend you...
BUY DCP Midstream Partners (NYSE: DPM) up to $44 per share. Right now, shares trade around $53.50.
Williams Partners (NYSE: WPZ)
Williams Partners is one of the biggest natural gas pipeline companies in the U.S., with an enterprise value of over $30 billion. It is also the third-largest NGL producer behind fellow portfolio holdings DCP Midstream and Enterprise Products.
Williams has no presence in the Eagle Ford Shale and only a small exposure to the Bakken. But as you'll see, WPZ is highly active in the Marcellus and Utica Shales...
WPZ owns half of the 760-mile Overland Pass Pipeline (OKS owns the other half), extending from Opal, Wyoming to Conway, Kansas. Overland Pass was recently expanded to its maximum capacity of 255,000 barrels per day to handle lots of new NGLs from the Bakken Shale. WPZ owns 14.6% of Aux Sable Liquid Products, which owns gas processing and NGL fractionation near Chicago. Aux Sable has an 83-mile pipeline in North Dakota that ships NGLs from the Bakken to the Chicago processing/fractionation plant.
The Marcellus and neighboring Utica Shale combine to form a single area of investment for WPZ. It'll spend more than $3 billion on expansions and new pipelines in the Marcellus/Utica between now and 2015. Roughly two-thirds of that investment will be made in NGL-rich regions.
WPZ doubled its gas-gathering capacity in the Marcellus/Utica in one year from the first quarter of 2012 to the first quarter of 2013. WPZ sees Marcellus/Utica as important to its future growth. WPZ expects an extra 1 billion barrels per day of NGLs will be in need of transportation and processing by 2020.
WPZ will expand its existing Leidy Line natural gas pipeline from the Marcellus Shale to New York and New Jersey at a cost of $390 million. WPZ's Leidy Southeast project will expand WPZ's Transco pipeline from the Marcellus to Alabama, at a cost of $600 million.
WPZ bought Caiman Eastern Midstream, LLC last year, with pipelines and processing in the liquids-rich Ohio Valley area of the Marcellus. Caiman's Fort Beeler plant has 320 million cubic feet per day of natural gas processing capacity. Its Moundsville fractionator has 13,000 barrels per day of NGL capacity. An NGL pipeline has been added, connecting the two facilities. WPZ is adding 200 million cubic feet per day of processing to Caiman's Oak Grove facility. It'll add to Moundsville's capacity, bringing the total to 43,000 barrels per day.
WPZ's 33-mile Springville gas pipeline in the Marcellus region of northeast Pennsylvania delivers 635 million cubic feet per day to WPZ's Transco pipeline (the 10,000 mile natural gas pipeline from Texas to New York, the largest natural gas pipeline system in the country). Springville is part of WPZ's Susquehanna Supply Hub, which is expected to reach 3 billion cubic feet per day of natural gas transportation capacity by 2015. Susquehanna also owns 10 miles of natural gas gathering pipelines in southern New York, also in the Marcellus Shale.
WPZ owns 51% of Laurel Mountain Midstream, with 2,000 miles of pipeline capacity of about 630 million cubic feet per day of gathering capacity the liquids-rich western Pennsylvania region of the Marcellus Shale. WPZ's proposed 120-mile Constitution pipeline would connect the Marcellus Shale region of northeastern Pennsylvania to the Iroquois pipeline in New York.
WPZ is trading for roughly 11 times distributable cash flow. It's trading at a current yield of roughly 3.9% above the 10-year U.S. Treasury yield. When it drops back into range, we recommend you...
BUY Williams Partners (NYSE: WPZ) up to $51 a share. Right now, shares trade for around $52.50.
Bringing It All Together
NGLs are the key raw materials upon which the American Industrial Renaissance is built. And our recommended MLPs are all invested in the sources of those NGLs: the three most NGL-rich shales in the country. They are the biggest players at the center of the NGL universe.
Our Seven-Step MLP Selection Model and our conservative buy prices got us into some of the best MLPs in the world, including the three companies at the center of the universe for the natural gas liquids industry.
If you've bought our recommended MLPs, you have a good level of exposure to the oil and gas boom and the resulting American Industrial Renaissance. If you haven't done so yet, you can start with ONEOK Partners and Energy Transfer Partners – currently our two recommended MLPs in buy range. (ETP has been waffling around its buy price for the last few days. If it's trading above $52 by the time you read this, do not buy shares. Wait until it dips back down into range.) Keep an eye on Williams Partners and Kinder Morgan Management, too. They're almost in buy range.
Otherwise, sit back, collect your income, and mind your trailing stops.
• There's no better place to learn about
and keep up with the oil, gas, and
NGL industries than RBN Energy's
daily blog. You can access it here.
• Enterprise Products Partners (EPD) is
a big, diversified MLP – so it's a great
stock to watch if you want to keep
tabs on the pipeline industry. Visit
EPD's investor presentations page