The U.S. has the largest energy pipeline network in the world, stretching more than 2.4 million miles. Each day, millions of barrels of petroleum products move through these pipelines, generating a steady stream of toll-like fees for the companies that operate these systems. Because of that, most pipeline companies produce gobs of free cash flow each year, giving them plenty of money to pay high-yielding dividends to investors, as well as invest in expanding their systems.
Further, many midstream companies structure themselves as master limited partnerships so that they can generate even more cash flow. That helped all of the following five MLPs to produce more than $1 billion in free cash flow last year, making them among the top cash cows in the sector:
Distributable Cash Flow in 2017
Enterprise Products Partners
Energy Transfer Partners
Plains All American Pipelines
Magellan Midstream Partners
Data source: Enterprise Products Partners, Plains All American Pipelines, MPLX, Magellan Midstream Partners, Energy Transfer Equity, and Energy Transfer Partners.
Image source: Getty Images.
Building on a record year
In 2017, Enterprise Products Partners generated a record $4.5 billion in free cash flow, an increase of 10% from the prior year. The company sent $3.6 billion of that money back to investors, which was a 4.5% increase on a per-unit basis from the previous year, helping support its lucrative distribution that currently yields 5.9%.
Enterprise used the money it retained, plus incremental borrowings and other sources of cash, to complete $4.5 billion of growth projects. Those expansions have driven a 40% increase in cash flow through the first half of this year, which positions Enterprise to continue increasing its distribution to investors as it has in each of the last 56 consecutive quarters.
Restructuring to continue cashing in
Energy Transfer Partners' distributable cash flow surged nearly 15% last year, to about $4.2 billion, thanks in part to the start-up of several new pipelines. The company paid roughly 25% of that cash to its parent Energy Transfer Equity , distributed another 58% to investors in support of its 10%-yielding dividend, and reinvested the balance into pipeline expansions. Going forward, Energy Transfer expects to retain more cash flow to finance its rapidly expanding pipeline network, which it will accomplish by merging with Energy Transfer Equity to form a single MLP focused on operating cash-gushing pipelines that also will support the combined company's 6.9%-yielding distribution.
Image source: Getty Images.
Getting big quickly
MPLX's pipeline-fueled distributable cash flow rocketed more than 40% last year thanks to recently completed expansions and the acquisition of the several midstream assets from its parent Marathon Petroleum . Cash flow should continue rocketing this year since the two companies completed an even larger deal, which will boost MPLX's annual earnings by $1 billion.
Meanwhile, Marathon Petroleum recently announced that it's buying a rival refining company that also owns some midstream assets and another MLP, which it could eventually combine with MPLX. That acquisition-fueled growth potential, when combined with an increasing supply of expansion projects, positions MLPX to become an even bigger cash cow in the coming years, which should support the continued growth of its 7%-yielding payout.
Fattening up the cash cow
Oil pipeline MLP Plains All American Pipeline was the only company on this list that didn't grow cash flow last year, as it fell about $100 million due to the impact that lower oil prices had on the volumes flowing through its pipeline systems. However, with oil prices on the upswing in 2018, Plains expects its distributable cash flow to rise nearly 13%. That will provide it with enough money to cover its 4.5%-yielding distribution by a very comfortable 1.7 times, leaving it with ample excess to pay down debt and expand its pipeline network, which could fuel another double-digit increase in cash flow next year.
Steady growth continues
Magellan Midstream Partners' distributable cash flow rose about 8% last year, to just over $1 billion. While the refined products pipeline company expects a slower pace of growth this year, it has more than $2 billion of expansion projects underway, which should provide it with the cash flow to increase its 5.5%-yielding payout 8% this year, and a 5% to 8% annual rate in 2019 and 2020.
MLPs are great options for income seekers
Pipelines tend to generate boatloads of cash flow since shippers pay fees to transport volumes through these systems. Because of that, companies that own pipelines tend to be cash cows -- especially MLPs, since that structure enables them to generate more cash. That gives them the money to pay what tend to be very lucrative dividends, making them ideal options for income investors to consider buying.
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Matthew DiLallo owns shares of Enterprise Products Partners. The Motley Fool recommends Enterprise Products Partners and Magellan Midstream Partners. The Motley Fool has a disclosure policy .