The Gatekeepers of America’s Energy Superhighway

Submitted by Wall St. Daily using our Trefis Contributor Tool

Three companies control America’s energy superhighway – and all of them are passing their profits on to investors in the form of dividend payouts.

They’re able to do this because they’re structured as master limited partnerships (MLPs).

If you’re unfamiliar with the term, MLPs don’t pay taxes on their profits. Money is only taxed when shareholders receive dividends. But they still have the liquidity of a publicly traded company.

In the United States, MLPs are mostly limited to enterprises engaged in natural resources – like oil and gas transportation.

The MLPs I’m talking about today are companies that own pipeline, terminals and processing plants. In other words, they run the arteries that transport America’s liquid energy.

The beauty of these companies is that their earnings are tied to volume, rather than the price of the commodities they transport. So the prices of oil, natural gas and natural gas liquids are pretty much irrelevant – as long as there’s adequate demand.

And there is, thanks to the huge rise in horizontal drilling and fracking. Demand is growing, too.

In fact, demand is rising fast enough that the superhighway that carries America’s energy bounty isn’t big enough to accommodate all the traffic.

So it will need to be expanded in the years ahead, which means more pipelines. More pipelines will lead to more energy traffic. And that traffic will hand more profits to midstream energy companies.

In fact, Morgan Stanley (NYSE: MS) Managing Director and MLP analyst, Stephen Maresca, recently told The Energy Report that his firm sees $60 billion in growth capital being spent by pipeline companies over the next three to four years:

“Midstream companies are adding projects not just for this year but as far as three years out… We see cash flows for these companies, in many cases, rising 11% to 12% per year over this period because of the buildout.”

This added cash flow will increase the already massive dividend payouts these MLPs offer. Plus, the value of the underlying MLP will surge as investors move in to take advantage of the higher yields.

Here are three MLPs perfectly positioned to capitalize once these developments kick in.

MLP #1: Sunoco Logistics Partners (Dividend Yield: 4.5%)

The first MLP we’re going to look at is Sunoco Logistics Partners (NYSE: SXL) – a company with 5,000 miles of pipeline in the Midwest, as well as oil storage and refining capacity from the Great Lakes to the Gulf Coast.

Sunoco reported second-quarter earnings last Thursday, and the company absolutely crushed analysts’ estimates.

Earnings came in at $1.28 per share for the quarter, handily topping the consensus estimate of $0.71 per share. It also reported revenue of $12.2 billion, up from $11.3 billion a year ago.

Those results got a lot of attention, with Bank of America (NYSE: BAC) and Citigroup (NYSE: C) upgrading the stock to a “Buy.”

In a report published Monday, Citigroup raised its 2012 and 2013 EBITDA estimates for Sunoco by 7.6% and 9% respectively. The bank also raised its price target to $55.50 per share. That represents a 33% premium to the current price.

Shares are now up 23% since June 1 – a spectacular run. And the stock yields 4.5%.

MLP #2: Kinder Morgan Energy Partners LP (Dividend Yield: 6.17%)

Sunoco isn’t the only midstream MLP making headlines, either.

Others have made a splash with huge acquisitions.

For example, Kinder Morgan Energy Partners LP (NYSE: KMP) became the biggest U.S. pipeline operator in May when its parent company, Kinder Morgan Inc. (NYSE: KMI), bought El Paso Corp.

KMP’s second-quarter profit actually fell because of that acquisition, since the company was forced to sell some of its assets for less than they were worth just to obtain regulatory approval for KMI’s acquisition.

However, on Monday, KMI agreed to sell all of its Tennessee Gas Pipeline and a 50% interest in the El Paso Natural Gas Pipeline to KMP, for about $6.22 billion. That deal brings a total of 24,100 miles of pipeline to KMP’s network, compensating for the assets it was forced to part with before.

Additionally, KMP increased its dividend by 7%, to $1.23 per unit, while distributable cash flow rose to $366 million from $324 million.

KMP now yields 6.17%, making it an absolute steal at current levels.

MLP #3: Energy Transfer Equity (Dividend Yield: 5.9%)

The third and final MLP on my list is Energy Transfer Equity (NYSE: ETE).

ETE reported lower second-quarter earnings and revenue. But that was largely due to higher debt expenses following the acquisition of Sunoco Inc. (NYSE: SUN) by its subsidiary, Energy Transfer Partners LP (NYSE: ETP).

Sunoco Inc., of course, has a stake in Sunoco Logistics Partners. That will hand ETE a piece of Sunoco’s midstream assets.

Also, ETE acquired Southern Union Group for $3.7 billion last year, putting it in control of more than 44,000 miles of gas pipeline capable of carrying 30.7 billion cubic feet of gas per day – almost half of the average daily U.S. consumption.

ETE currently yields 5.9%.

Bottom line: These MLPs offer sizeable yields that are supported by strong cash flow growth. And since they’re also uniquely positioned to capitalize on the growing demand for energy transportation infrastructure, they’re definitely worth a spot on your watch list right now.