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The "Sweet Spot:" These Pipeline Companies Just Got the Goldman Seal of Approval

by | published March 14th, 2012

Nothing like having the world’s most eminent (or is it notorious) investment bank confirm what we’ve already been saying for a year

Last week, Goldman Sachs (NYSE: GS) reminded us that they are bullish on the oil and gas pipeline sector by upgrading a number of stocks that have been prominent features of our discussions on the sector.

Goldman analysts added a number of pipeline firms to their “Conviction Buy” list. They added Williams Companies (NYSE: WMB)They also raised a number of additional stocks to the “Buy” list, including Plains All American Pipeline (NYSE: PAA), and maintained “Buy” ratings on Enterprise Products Partners (NYSE: EPD) and Enduro Royalty Trust (NYSE: NDRO), and Magellan Midstream Partners (NYSE: MMP)

It’s not surprising to us that Goldman Sachs is suddenly so bullish on the pipeline industry. After all, my colleague Kent has been touting the best-known secret in the markets for more than a year.

And, once again, here it is.

The Sweet Spot in Oil and Gas Pipelines Companies

If you want to make money in energy investing, you need to park yourself right in the middle of the supply chain. By doing so, you’re far less susceptible to price fluctuations in the underlying commodity, and you are able to collect easy profits from the growing demand in fuels.

I’m talking about midstream companies – those that connect the “upstream” exploration and production companies to the “downstream” retail, refining, and marketing channels, and provide vital services in transportation, storage, and processing.

Simply put, this is the “Sweet Spot” of energy investing.

Midstream MLP operations in particular generate fee-based revenues on fuel volumes going through the pipeline, so these companies enjoy less exposure to price volatility – a very welcome sign to the risk-adverse investor.

And it’s these partnerships that typically pay higher yields in the form of distributions to shareholders and offer the ever-tantalizing share appreciation opportunities.

Of course, choosing the right MLP is always a challenge, even if you’re a Goldman analyst. That’s why, just a few months ago, I wrote at length about the best way to make that decision.

Goldman used this very metric in its own analysis before making those recent recommendations.

Look at Distributable Cash Flows

Goldman Sachs conducted thorough analysis of each company’s potential to transport oil and gas liquids through their network of midstream services. Volume is always an important metric, as is the proximity to the ever-expanding shale fields across the United States.

But the reality is, the ability to simply transfer or store oil and gas is not enough to justify buying shares in any of these midstream companies.

There’s another important metric you need to keep your eye on. Cash flow.

Cash flow is the most important measurement of how to analyze Master Limited Partnerships or other midstream companies to obtain the best distribution returns.

Many of these companies have very strong yields and pay them out in the form of quarterly distributions to shareholders. Yet these distribution payments must be funded by the companies’ cash on hand. We don’t want to see that they are taking on new levels of debt in order to do so.

Not only will that impact the reliability of the distribution levels; it can greatly impact the share price, too.

By paying attention to cash flows, you’re able to accurately measure how a company can account pipeline depreciation or other ways that the partnership reduces its tax burden and pass profits along to investors.

And those profits are what we really care about at the end of the day.

But remember, the MLP will not pay out all of its cash distributions at once. It’s necessary for these partnerships to retain some of their resources. Management may need to expand operations or ensure that it can continue to pay its distributions at the same yield level in the future (or even raise them).

And a strong history of increasing yields and the company being able to meet its dividend obligations should be a signal of good things to come.

Midstream MLPs remain a major advantage for the income-seeking investor.

Just one note: You’ll want to find a yield that’s in (or close to) the double digits.

And if we know the best ways to measure their potential, that’s even better.

Goldman Sachs is telling us what we already knew.

But there’s nothing wrong with that. It’s good to know that one of the world’s smartest banks has taken such a keen interest in the oil and gas pipeline sector along with us.

Sincerely,

James

[Editor's Note: The cost of oil is on the rise, but midstream companies are still poised to make huge profits in the coming months as demand continues to outstrip supply around the world.

And that's another reason people all over the world are turning to Kent.

Kent continues to show his Energy Advantage subscribers how to profit on the best midstream oil and gas companies, many of which have been ignored by the big boys. And it doesn't take much money to make huge gains in this sector. To access Kent's latest oil and gas research, go here now.]

Please Note: Kent cannot respond to your comments and questions directly. But he can address them in future alerts... so keep an eye on your inbox. If you have a question about your subscription, please email us directly at customerservice@oilandenergyinvestor.com

  1. March 14th, 2012 at 14:32 | #1

    Dr. Moors, your cautionary email yesterday about forthcoming price increases in the petroleum industry was THE most sobering message you’ve ever delivered. It left me pretty depressed, and I wonder if anyone else feels the same about it. When YOU talk this way, you have a marked effect on me, for sure, and probably many others, too. We’re more used to your ebullient, tongue-in-cheek style. Hope things aren’t going to be TOO, TOO bad!

    (Sent from my NOOK)

  2. bikerron1
    March 14th, 2012 at 15:16 | #2

    The forthcoming price increases are just the start of things to come.We most likely only months away of a Mid-East blow up. This will be a sobering message for Washington. That will be the start of making this country energy independent. So all the U.S. E&Ps company’s will do very well and a place to park some money.

  3. jimbo
    March 14th, 2012 at 16:01 | #3

    ONE OF THE WORLDS SMARTEST BANKS? THEY REFER TO THEIR CLIENTS THEY RIP OFF AS MUPPETS. THEY ARE TO BIG TO FAIL. THEY ARE THE CORNERSTONE OF EVIL AND GREED IN THE WORLD,…….BUT I GUESS THEY ARE SMART. SMART ENOUGH TO GET BURIED WHEN ITS ALL SAID AND DONE,……RIGHT ALONG WITH THE REST OF THEM!

  4. Sceptical
    March 15th, 2012 at 01:32 | #4

    “If it looks too good to be true , it usually is.” I have been burned so understand this all too well.
    Please help me here. I have been reading the emaiis and listening with great concentration to all the amazing expertise. I have not yet put one red cent into it. And then I read of the profit and wonder:
    How come, Dr kent, with all due and sincerely meant respect, are you bothering with us, the “little people”?
    Yes, you do get revenue from subscriptions, but with your knowledge and predictions and world recognition, I have got to think this is a drop in the ocean for you.
    I hear you all (3) when you say you are tired of the big/bad boys manipulating us.
    I too have been one to stand up for the underdog, but this all seems very extensive.
    Then, as you say today, you will not give your new tools to those on wall street and hedge fund dealers.
    But they can access it just as I can. What’s to stop them?
    I really want to believe and I desperately need to earn more than the almost non-existant bank rates.
    I am 61, have a fixed amount of capital. Need to earn enough to lve and still have capital growth.
    Yes, everyone’s dream. I need to.
    Please please answer this mail. Thank you. Whatever happens …….. it’s always very intersting reading and listening.
    Thank you.

  5. Louis Sack
    March 15th, 2012 at 06:37 | #5

    Dr. Moors,
    I have investments the Canadian oils sands shares. I am taking losses there. Should I take losses and invest in the US oil and gas companies?
    Thanking you

    Louis Sack

  6. Zephyra
    March 26th, 2012 at 02:18 | #6

    Dr Moors

    I wanted to know what are the other metrics you would delve deep into to rank the performance of midstream companies apart from distributional cash flows and yield.

    Regards

  7. Zephyra
    March 26th, 2012 at 02:21 | #7

    Just to add to my previous comment. Midstream are fee-based and have a very low sensitivity to energy prices. However, they is much noise around fractionation and processing margins. Do those reflect well? Or cash flows would be a better indicator?

    Thanks and regards

  8. enthusceptic
    March 30th, 2012 at 11:14 | #8

    There are still some who try to get free personal advice: Read about the sector and study how companies develop. Advice alone is not enough.

  9. August 6th, 2012 at 06:28 | #9

    Kent – We [the Developed World] have learned to construct Pipelines
    over difficult terrains, so why don’t those countries dependent on the output of the oil and gas that could be “shut-in’ by HOSTILE IRANIAN actions SIMPLY build a relatively LARGE but SHORT pipeline on the Western shores of the Persian Gulf ? Sure it would make for double handling, etc.

    But the Republican Guard’s ability to earn needed currency from the Commodity Pits just by making a threat and then selling options would end. The immediate war threat would ss well: As in we don’t need you. We can remove expensive war fleets from the Straits and reduce World tension,

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