Exxon Mobil Corporation (XOM), Kinder Morgan Energy Partners LP (KMP): Best of the Midstream Master Limited Partnerships

MLPs are the most stable way to get exposure to the U.S. energy boom in natural gas and oil. Master Limited Partnership pipelines are not exposed to the commodity prices and typically come with outsized dividends. However, MLPs come with special tax considerations too; you should consult a tax specialist before you purchase an MLP.

Commodity prices

Companies like Exxon Mobil Corporation (NYSE:XOM) and Chevron are linked to the underlying commodity prices, and tend to trade with the price of oil and natural gas. MLPs, on the other hand, make their money depending on how much volume is run through their pipeline network. Kinder Morgan Energy Partners LP (NYSE:KMP) is much more like a toll-road in that respect, it doesn’t matter if the car driving on it costs $50,000 or $5,000, each car pays the same price. This gives these stocks more stability than other companies in the industry.

Kinder Morgan Energy Partners LP (NYSE:KMP) keeps expanding its reach. In January, Kinder Morgan said it will acquire Copano for $5 billion, including the assumption of debt. Kinder is also realizing more cost savings from the El Paso purchase than it had originally estimated. The most recent purchase of Copano will give Kinder Morgan Energy Partners LP (NYSE:KMP) more exposure to natural gas and processing. During the first quarter conference call, Kinder Morgan expects to spend at least $7 billion in capital projects that will help support its long term 8% distribution increase target.

Tax advantage

A limited partnership doesn’t pay taxes on its profit, it is taxed when the unit holders receive distributions. As the yield on municipal bonds remain low, yield hungry investors can turn to MLPs to take their place as the tax advantaged investment of choice. The business of moving hydrocarbons is now booming in America, and these companies are benefiting handsomely.

Cost and safety

Pipelines are in high demand, especially in the Dakotas, where they are currently shipping oil and compressed natural gas by truck and train. Once the pipes are laid, pipelines are the most efficient way to move these resources. As more of these pipelines come online, these companies will be able to process and export the product to the gulf where it can be sold internationally at global prices.

Using pipelines to transport hydrocarbons is the safest and most consistent way to move these products. With the recent rupture of an Exxon Mobil Corporation (NYSE:XOM) pipeline in Arkansas, safety is a renewed concern. Kinder Morgan Energy Partners LP (NYSE:KMP) still remains a leader in accidents per mile of pipeline.

Yield

Enterprise Products Partners L.P. (NYSE:EPD) has increased distributions to its unit holders for 35 consecutive years, the longest of any partnership. Enterprise Products Partners L.P. (NYSE:EPD) also has more exposure to processing and export facilities than than Kinder Morgan Energy Partners LP (NYSE:KMP), but has a slightly lower yield at 4.40%. As more pipes are laid leading to its export terminals in the gulf, we will see distributions continue to rise in tandem with volumes.