The United States has become an active player in global oil and gas markets.
Crude oil and refined products output are showing sustained growth. The game changer was the advent of shale gas. Exploration and Production (E&P) companies were quick to adopt fracking to access the shale gas potential in the United States. The resulting increase in natural gas production increased the need for oil and gas transportation companies.
Companies in the oil and gas pipeline industry are defensive in nature. The reason why these companies display defensive behavior is because their contracts are fee-based. They charge oil and gas companies for the amount of products that flow through their systems. Therefore, they are not affected by changing commodity prices. Oil and gas pipeline companies, therefore, are good value stocks as they maintain attractive payout ratios and do not show volatility in their prices. I believe that an investment in a mid-cap oil and gas pipeline company is ideal for value investors.
Let’s analyze three mid-cap oil and gas pipeline companies to gauge which one of them provides the best investment opportunity. The companies are Buckeye Partners, L.P. (NYSE:BPL), Boardwalk Pipeline Partners, LP (NYSE:BWP) and DCP Midstream Partners, LP (NYSE:DPM).
Buckeye’s strategic asset
One of the most strategic assets of Buckeye Partners, L.P. (NYSE:BPL) is its Perth Amboy facility. Buckeye purchased the facility from Chevron and the deal was closed in July 2012. Through the facility, Buckeye can ensure the security and diversity of product supply to its customers. The company would do this by connecting the waterborne petroleum supply with destination markets across the Buckeye network. Buckeye Partners, L.P. (NYSE:BPL) is planning to make this a highly-efficient and multi-product storage, blending and throughput facility.
Boardwalk’s organic growth prospects
Boardwalk Pipeline Partners, LP (NYSE:BWP) engages in the ownership and operation of natural gas liquids (NGLs) and natural gas pipelines and storage systems in the United States.
The majority of the company’s operations are located in the Gulf Coast regions of Texas, Louisiana, Florida and Alabama. The company also has a Texas Gas transmission line and several projects which are under development in the Marcellus Shale. The company is planning to grow organically by offering a greater array of services to its producer customers and by adding projects to serve new and existing end users. The positive trends are evident in the financials of the company. From the year 2007, the company’s revenues and EBITDA figures have been increasing at a CAGR of 13% and 16%, respectively. The company is also finalizing an important joint venture with Williams Companies, Inc. (NYSE:WMB) aimed at moving NGLs from the Marcellus and Utica to the Gulf Coast. The company has been holding its distribution to its partners steady for the last five quarters. This means that there are chances that as the company grows, it will increase its distributions to its limited partners.
Strategic positioning of DCP
DCP Midstream Partners, LP (NYSE:DPM) engages in gathering, compressing, treating, transporting and selling natural gas in the United States. It also transports and sells propane and natural gas liquids (NGLs). The industry fundamentals for the company are attractive as it has operations in the most attractive basins of the United States, including Permian, Eagle Ford, DJ etc. The company is leveraging its expanding G&P footprint to extend its operations down the value chain by building NGL pipelines. End users of DCP include petrochemical crackers, ethane/propane exporters and refineries. These users belong to the rapidly expanding markets which will continue to provide growth for DCP in the coming future. Diversity in its customer base also allows the company to operate at a much lower risk than its peers. DCP has been showing some impressive financial results. The EBITDA of the company has been steadily increasing after its fall in the year 2009.
The takeaway
Recent trends in the oil and gas sector have made the oil and gas pipelines companies emerge as solid investment opportunities. The lower risk profile of these companies makes them attractive. All three companies analyzed above are positioned for growth.
Awais Iqbal has no position in any stocks mentioned. The Motley Fool recommends DCP Midstream Partners, LP. Awais is a member of The Motley Fool Blog Network — entries represent the personal opinion of the blogger and are not formally edited.
The article Is Shale Gas Boom Fueling Demand for This Industry? originally appeared on Fool.com and is written by Awais Iqbal.
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