My friend's grandfather dabbled inreal estate and
landspeculation nearly his entire life. He left a substantial
amount of farmland to his heirs, but this land never appreciated
much, wasn't great for farming and didn't produce anyincome .
The propertytaxes grew burdensome for the heirs, and they
searched for a buyer. They nearly gave up on dumping the land --
but then abroker from a natural gas company came knocking.
It turns out the land sits atop the lucrative Marcellus Shale
formation. The company wanted to lease fracking rights on the
land and pay the owners a percentage of the profits from the oil
and gas below. The once-worthless land quickly became a
If the old landspeculator is watching from heaven, he's
probably jumping for joy at how hisinvestment turned out.
However, you don't have to be a lucky land speculator toprofit
from the fracking boom.
Hearing about my friend's grandfather's land made me think of
research report that I read recently about master limited
partnerships, particularly the midstream variety.
A masterlimited partnership , or MLP, is a publicly traded
limited partnership that generally operates in the natural
resources, financial services or real estate sectors.
One advantage that MLPs have over corporations is that an MLP
is considered to be an aggregate of its partners and not a
separate entity. This provides the tax advantage of apartnership
and theliquidity of an exchange-tradedstock .
Midstream MLPs are companies that gather, store and transport
natural gas, crude oil and natural gas liquids. In other words,
these companies move and store natural resources along the supply
chain, from drilling sites to end users. These companies operate
with long-term contracts, are often protected by
government-regulated rates, and haveinflation addressed within
the contract. This creates a secure, long-term, dividend-paying
In her research report, Carla likens midstream MLPs to
toll-road operators in that they are more dependent on shipping
volumes than on thecommodity product price itself. Considering
that demand for gas and oil is mostlyinelastic (meaning demand
stays relatively constant, regardless of price), this creates a
very secure investment opportunity.
In addition, natural gas and oil production is booming in the
United States, with the Eagle Ford in South Texas and the
Marcellus Shale in Pennsylvania particularly hot markets. U.S.
oil production has increased by 30% since 2009, to more than 6.4
million barrels per day. Natural gas production is also
increasing, and interestingly, natural gas prices are trending
higher as the supply glut works itself out.
Income investors are benefiting from the success of MLPs. For
example, over the past five years,
Kinder Morgan (
increased distributions by an annual average of 7%;
averaged 8%, and
What's the best MLP for investors? I agree with Carla in
Kinder Morgan Energy Partners (
as a favorite choice to capture profits from the booming MLP
business. KMP is the largest midstream company in North America,
with 73,000 miles of pipelines and 180 storage terminals.
KMP pays out an annual $5.16 a share in dividends, marking a
yield of 5.7% with quarterly payments.Earnings increased from
$1.26 billion in 2011 to $1.34 billion in 2012, whilefixed assets
soared 22%, to $19 billion.Revenue is projected to increase to
just over $10 billion in 2013, representing a 17% increase over
2012, as profits from the Januaryacquisition of
Copano Energy (Nasdaq: CPNO)
begin to flow.
Technically,support rests at $84, and buying on a breakout
close above $91puts the momentumfactor on your side.
Risks to Consider:
It's important tonote that KMP has been trading at a premium
valuation. Acorrection in the sector may result in a steep price
decline. In addition, alternative fuel sources may eventually
supersede the need for traditional commodity fuel products. A
slowdown in the U.S.economy could also negatively affect the MLP
Action to Take -->
I like KMP for its steady, increasingdividend andappreciation
potential and the growth in its underlying business. Given the
projections and overall boom nature of the sector, I would not be
surprised to see this stock at $115 within the next 18 months. As
always, be sure to use stops orders and position size properly