From the 1980s until crude oil crashed in 2015, the master limited partnership (MLP) structure dominated energy midstream—your gathering, pipeline, processing, and storage companies. Midstream revenues come from committed fee structures and are very predictable and MLPs pay tax-advantaged distributions, so the structure can be very profitable for the sponsor/general partner/owner.
But many investors don’t want the tax hassles of owning partnership units, and after the energy sector went through tremendous upheaval from late 2014 to early 2016, when crude oil went from over $100 per barrel to $30, a lot of midstream companies were pushed into more familiar corporate business structures. Many corporate sponsors of MLPs chose to absorb the partnerships into their corporations.
Today, out of the ten largest midstream companies, only three are MLPs.
Corporate midstream stocks have the advantage of sending out a familiar Forms 1099 at tax time instead of the more time-consuming and often frustrating Schedule K-1. Midstream corporations continued the sector policy of paying attractive and growing dividends.
Investors buy midstream stocks for attractive yields and growing dividend rates. Dividend growth produces steady share price appreciation, too.
So today, let’s go over the five largest U.S. midstream corporations, by market cap…
Kinder Morgan (KMI) is a pipeline and storage company transporting crude oil, natural gas, gasoline, and carbon dioxide. The network consists of 83,000 miles of pipeline and 141 terminals. Kinder Morgan currently yields 6.1% and has a three-year annual dividend growth rate of 6.7%.
The Williams Companies (WMB) focus on natural gas gathering, processing, and pipeline transport. The company gathers gas in the Gulf of Mexico, Texas, Colorado, and Wyoming and transports it to the Northeast and Northwest. The Williams Companies yield 5.2% and has been growing the dividend by 4.5% yearly.
Cheniere Energy (LNG) has built a massive natural gas liquefaction plant on the U.S. Gulf Coast. The company has invested more than $38 billion in the facility. Chenier pays a small dividend for a 0.80% yield. I expect the dividend to grow as the capital investments wind down and free cash flow increases. Liquid natural gas is the primary energy source for much of the world’s future.
ONEOK Inc. (OKE) provides natural gas gathering, processing, and pipeline transport. The company owns the nation’s premier natural gas liquids (NGLs) system. NGLs are products like propane, butane, and ethane, which are processed from natural gas. ONEOK yields 6.1% and has a 2.5% three-year compound dividend growth rate. The ten-year dividend growth rate comes in at 13%, and if the company returns to historical dividend increases, this will be a great stock to own.
Targa Resources Corp (TRGP) is engaged in gathering, compressing, treating, processing, and selling natural gas and NGLs. The company has extensive export capabilities. TRGP slashed its dividend by 90% at the start of the pandemic. In January 2022, the dividend was increased by 250%, recovering about one-third of the cut. The dividend will continue to recover to pre-pandemic levels. The current yield is 2.0%.
