Oneok Partners LP (OKS), Enterprise Products Partners L.P. (EPD), Kinder Morgan Management, LLC (KMR): Earn Great Income With Upside Potential

Note: This article has been amended to correct Enterprise Products Partners dividend yield.

A 0% interest rate environment has created a crowd of hungry-for-yield investors. With rates so low, you have two options — either stash your money in CDs earning close to nothing, or invest in highly speculative investments. Well, now there’s also a third way: invest your money in financial vehicles called MLPs.

These partnerships will reward you with exceptionally high dividend payouts that you can count on. In fact, MLPs are required to pay out the majority of their income as dividends, similar to REITs. Although dividend yields have been historically much higher, the average MLP still boasts a healthy 5.7%. That’s almost three times as high as an average S&P 500 company.

The best of both worlds

Master Limited Partnerships (MLPs) are a form of corporate organization that carry the tax benefits of a partnership. Because MLPs do not have to pay corporate taxes, they have more cash available to fund their distributions and pay hefty dividends to their unit-holders. In particular, you can find many MLPs in the gas pipeline energy business. The energy revolution in the U.S hasn’t gone unnoticed, and these MLPs are trying to take advantage of it. With natural gas (NG) becoming so cheap, abundant, and popular (unlike “dirty” coal) — the stage is set for its revival.

And the great beneficiaries of this revival would be companies that are engaged in the NG industry. This means that today, you can enjoy both worlds — have an unlimited upside potential, and receive a healthy income stream from the dividends paid by MLPs.

The most successful candidates out there

I’ve listed below three superior MLPs. All three exhibit a conservative balance sheet – one with a reasonable amount of debt compared to cash, a proven ability to generate a consistent stream of cash flow, and most importantly – all three have a great growth potential.

ONEOK is more than just OK

Oneok Partners LP (NYSE:OKS) is the largest independent operator of natural gas gathering pipelines and processing plants in the Williston BasinThe company specializes in natural gas gathering and processing, natural gas pipelines, and natural gas liquids (NGLs).

It’s one of the biggest U.S. companies in all three businesses, with an enterprise value of $15.8 billion. Of the three, NGLs are Oneok Partners LP (NYSE:OKS)‘s biggest business and its biggest source of growth. NGLs were less than 20% of Oneok Partners LP (NYSE:OKS)‘s business in 2006. Today, they are more than 60%, and still the fastest-growing part.

Oneok Partners LP (NYSE:OKS) just completed its $600 million, 600-mile,12-inch Bakken NGL pipeline in April. It’s got an initial capacity of 60,000 barrels per day. Oneok Partners LP (NYSE:OKS) will invest $100 million on additional pumping stations to increase the pipeline’s capacity to 135,000 barrels per day.

This is the first pipeline ever to transport NGLs from the Williston Basin to key market centers in Conway, Kansas and to the Gulf Coast. That’s how this company is positioning itself to grab market share.

With long-term debt of $6.5 billion and annual cash flow from operations just shy of $1 billion, the company’s balance sheet is one of the most conservative ones in the industry. Oneok Partners LP (NYSE:OKS) is currently trading for less than nine times free cash flow. That’s really cheap, especially when you consider its 5.6% dividend yield.

A high-quality enterprise

Enterprise Products Partners L.P. (NYSE:EPD) is the largest publicly traded energy partnership in the U.S., with an enterprise value of more than $70 billion. It operates one of the largest pipeline networks in the country. Enterprise Products Partners L.P. (NYSE:EPD)‘ total estimated 2014 NGL fractionation capacity is 610,000 barrels per day. That’s 37.4% of the total fractionation capacity in the area – more than any other company.

Enterprise Products Partners L.P. (NYSE:EPD)‘ combined 2012 and (estimated) 2013 growth budget is $7.8 billion. It expects to spend $1.9 billion – nearly one-fourth of that — on the Eagle Ford over the period. That’s a lot for a huge company that does business all over the country. The Eagle Ford is obviously a big focus for Enterprise Products Partners L.P. (NYSE:EPD).

With long term debt of $15.5 billion and annual cash flow from operations of $1.2 billion, the company’s balance sheet is riskier than ONEOK’s, but it also offers better growth and higher dividends. All in all, the company isn’t cheap. It’s trading for more than 20 times free cash flow. But that’s the price of growth.

An octopus with many arms

Kinder Morgan Management, LLC (NYSE:KMR) is the third-largest energy company in America, with a total combined enterprise value of over $110 billion. It’s got assets in or near most of the major hydrocarbon-producing regions in the country, including the Bakken, Marcellus and Eagle Ford Shales.

Kinder Morgan Management, LLC (NYSE:KMR) spent $142 million to buy 42 acres of land so it can build a new ship dock connected to its Galena Park Terminal in the Houston Ship Channel, including 1.4 million barrels of storage tanks. It bought another 20 acres next to its Pasadena terminal for a future crude-condensate shipping and storage terminal, with 1.2 million barrels of storage. It will also build a new barge dock to help relieve congestion.

Kinder Morgan Management, LLC (NYSE:KMR) owns the Camino Real natural gas and oil gathering pipeline system in the Eagle Ford. It also owns 25% of EagleHawk Field Services and 50% of Eagle Ford Gathering, providing natural gas and condensate gathering, processing, and transportation in the Eagle Ford. Kinder Morgan Management, LLC (NYSE:KMR) is currently trading for roughly seven times free cash flow. That’s dirt-cheap.

My Foolish takeaway

Energy based MLPs are a great investment option. They offer both a “utility like” reliable stream of income, with a great upside potential as the gas business in the U.S will reach new highs. All three MLPs above exhibit a strong balance sheet, consistent cash flow stream, and a rewarding upside potential.

I believe that of all three, Oneok Partners LP (NYSE:OKS) will end up as the most successful MLP. It currently has a relatively low dividend yield (only 5.7%) which leaves plenty of room for a possible dividend hike. In addition, I believe that ONEOK’s investment in the first pipeline ever to transport NGLs from the Williston Basin to key market centers will prove to be a true bonanza for the company and its shareholders. NGL is a fast-growing business and ONEOK puts an great focus on it. Invest accordingly.

The article Earn Great Income With Upside Potential originally appeared on Fool.com and is written by Shmulik Karpf.

Shmulik Karpf has no position in any stocks mentioned. The Motley Fool recommends ONEOK Partners, L.P. Shmulik is a member of The Motley Fool Blog Network — entries represent the personal opinion of the blogger and are not formally edited.

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