Last year, the United States became the world’s largest exporter of liquefied natural gas (LNG), thanks to a surge in supplies to energy-strapped buyers in Europe and Asia amid Russia’s invasion of Ukraine and the global energy crisis. Indeed, the United States and North America accounted for the lion’s share long-term LNG contracts signed in 2022 for the export market, at least 20 deals signed. The largest contract in history was signed between Power transmission partners and Shell Plk. (NYSE: SHEL) to supply 2.1 million tons of LNG per year from 2026 to 2046.
Unfortunately, US efforts to further develop its natural gas sector are under threat from carryover restrictions, including limited pipeline capacity. In the Appalachian Basin, for example, the country’s largest gas producing region, producing more than 35 billion cubic feet per day, environmental groups have repeatedly halted or slowed down pipeline projects and limited further growth in the northeast. Thus, the Permian Basin and the Haynesville Shale should take on most of the projected growth in LNG exports. Actually, EQT Corp.(NYSE:EQT) CEO Toby Rice recently acknowledged that pipeline capacity in the Appalachians is “running into a wall.”
It is for this reason that all eyes are on the pipeline companies trying to save the day.
Analysts at East Daley Capital Inc. forecast that by 2030 LNG exports from the United States will grow to 26.3 billion cubic meters. feet per day from the current level of almost 13 billion cubic meters. Analysts say that between 2026 and 2030, another 2 to 4 billion cubic feet per day of takeaway capacity needs to be brought online in Haynesville for this to happen.
Against this backdrop, here are three pipeline companies that look like good buys right now.
Market cap: $7.5 billion
Dividend Yield (Fwd): 7.2%
Hess Midstream LP (NYSE: HSEM) is a traditional, reimbursable general limited partnership (MLP) originally created out of an integrated New York oil giant. Hess Company. (NYSE: HES) in 2014 to own, manage, develop and acquire a diverse set of mid-sized business assets to provide services to its parent company as well as third party clients..
Now, some investors want nothing to do with MLP—and for good reason. Prior to the oil price crash in 2014, MLPs were popular with income earning investors due to their slow but steady and near-guaranteed returns. Indeed, in past business cycles, MLP stocks have often outperformed oil and gas stocks due to their significantly higher returns, preferential tax treatment, and less exposure to commodity prices. Unfortunately, the big shift away from the MLP structure began in earnest in 2018 after the Federal Energy Regulatory Commission (FERC) canceled key policy in MLP tax expenses for interstate pipelines, which has increased the cost of business for many companies in space. To top it all off, Trump’s tax luxury, which cut the corporate tax rate from 35% to 21%, has severely reduced MLP’s tax advantage over traditional oil and gas companies. On the subject: Russian Lukoil sells strategic Italian refinery to Trafigura-backed company
But HESM continues to defy the odds and thrive in the midst of this storm. Firstly, this little known MLP has increased its distribution by over 140% in the last 5 years and is currently generating a very respectable 7.22%. HESM’s share price has even risen by 50% during this time compared to a 20% average energy company with large and mid-caps. In terms of earnings, Hess Midstream continues to impress after reporting Q3 2022 revenue of $334.8M (+10.2% YoY), $17.77M above Wall Street consensus and GAAP earnings per share for the 3rd quarter of $0.53 up $0.01. Meanwhile, adjusted EBITDA was $253.6 million; Distributable cash flow was $214.8 million and adjusted free cash flow amounted to 155.6 million dollars.
Hess Midstream announced a 5% increase in payouts by 2022 and intends to maintain this growth rate over the next two years, which could see the company return in excess of 8%. Other highly profitable MLPs: Holly Energy Partners LP (NYSE: HEP)+7.4%, LP Enterprise Products Partners (NYSE:EPD)+7.7% and Magellan Midstream Partners (NYSE: MMP)+8.1%.
Market cap: $42.1 billion
Dividend yield: 5.9%
Houston, Texas Kinder Morgan Inc. (NYSE: KMI) operates as an energy infrastructure company including natural gas pipelines, product pipelines, terminals and CO2 in North America.
After the oil price crash in 2014, Kinder Morgan cut spending and instead focused on strengthening its balance sheet. The company also made a radical and unpopular decision to cut its dividend, which ended up working as planned. Over the past three years, Kinder Morgan has been able to reduce its long-term debt by almost 30% and capital expenditure by 60%. This left the company with enough free cash flow to support a nearly 6% (ttm) dividend.
Another reason to love the company: Kinder Morgan contracts its assets on a long-term, take-or-pay, flat-fee basis that provides the company with stable cash flows regardless of the market cycle. Indeed, the stock did not suffer, like most of its peers, during the infamous 2020 gas price crash. On the other hand, KMI shares may not see much gain when gas prices soar, as they did before mid-2022. In other words, this is a good stock for investors looking for some downside protection in volatile markets.
Market cap: $39.8 billion
Dividend yield: 5.2%
Williams Inc. (NYSE: WMB) operates as an energy infrastructure company primarily engaged in the transportation of natural gas and natural gas liquefied gases.
Recently, WMB has been actively involved in mergers and acquisitions, seeking to expand and strengthen its gas pipeline network. In his latest Williams deal agreed to purchase Mountain West pipelines from southwest gas (NYSE: SWX) for $1.07 billion in cash, and to take on MoutainWest’s $430 million debt. MountainWest’s assets are located in Utah, Wyoming and Colorado and include an interstate gas pipeline system of about 2,000 miles with a throughput of about 8 billion cubic feet per day, as well as a natural gas storage facility of 56 billion cubic feet.
Williams says its latest acquisition will broaden the company’s range of services in the Rocky Mountain region, as well as increase its cash flow backed by a government-regulated tariff structure. The company also sees significant synergies as it integrates the inbound system into its existing assets, which it says could allow it to offer value-added services to shippers.
MountainWest deal follows Williams acquisition Track Midstream Haynesville collects and processes assets and also Nortex Midstream earlier this year. The company has been able to use the improving balance sheet to expand its gas infrastructure platform, which should boost earnings, cash flow and hopefully future dividends.
Alex Kimani for Oilprice.com
More popular articles on Oilprice.com: