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The 10 Biggest Pipeline Stocks

Matthew DiLallo, The Motley Fool

More energy pipelines run through the U.S. than any other country in the world -- and it's not even close. America's pipeline system of 1.38 million miles is more than eight times longer than that of distant runner-up Russia. They are the steel highway networks that deliver oil, natural gas, and other hydrocarbons from wells to refineries to energy-hungry North American consumers, and to the ports that ship those products around the world. 

Pipelines are a cheaper method of shipping those commodities than trucks and trains, and the companies that own them typically generate billions of dollars of free cash flow each year. They use those funds to pay their investors high-yielding dividends as well as to expand. That combination of growth and income can help these stocks produce market-beating total returns, making them great options for income-seeking investors.

This guide will introduce investors to the 10 biggest publicly traded pipeline companies by market cap and discuss the characteristics that enabled them to grow so large.

Sunset through the twists of a pipeline system.

Image source: Getty Images.

An overview of the pipeline industry

Pipelines serve as the chief bridge between upstream companies (the ones that extract crude oil and natural gas from the ground) and downstream companies (the ones that refine and process those raw materials into the various fuels and petrochemicals that are so vital to modern society).

And while businesses in both of those segments sometimes own pipeline infrastructure, too, the bulk of it rests in the hands of dedicated midstream companies, which typically operate the related processing, storage, and export facilities as well.

Given the vast scope of North America's oil and gas industry, investors have dozens of options to choose from among publicly traded midstream companies. They include traditional corporations headquartered in the U.S. and Canada, as well as master limited partnerships (MLPs), which have the distinct advantage of being exempt from federal corporate taxes.

The 10 largest pipeline-focused companies by enterprise value:

Company

Enterprise Value

Corporate Structure

Enbridge (NYSE: ENB)

$130.4 billion

Canadian corporation

Energy Transfer (NYSE: ET)

$95.9 billion

MLP

Enterprise Products Partners (NYSE: EPD)

$93.2 billion

MLP

TC Energy (NYSE: TRP)

$88.0 billion

Canadian corporation

Kinder Morgan (NYSE: KMI)

$83.1 billion

U.S. corporation

Williams Companies (NYSE: WMB)

$58.2 billion

U.S. corporation

MPLX (NYSE: MPLX)

$39.5 billion

MLP

ONEOK (NYSE: OKE)

$39.0 billion

U.S. corporation

Pembina Pipeline (NYSE: PBA)

$26.8 billion

Canadian corporation

Plains All American Pipeline (NYSE: PAA)

$26.8 billion

MLP

Data source: Ycharts, values as of July 18, 2019. Enterprise value is the sum of a company's market capitalization and its net debt.

All these companies operate diversified portfolios of midstream assets. However, each one has focused on dominating a niche. They leveraged that strength to expand into other segments of the market so that they were able to grow into one of the largest pipeline operators in North America. Here's a closer look at the six largest ones structured as corporations, as well as the four largest MLPs.

Pipelines going over a blue sea and with a blue sky above.

Image source: Getty Images.

Enbridge: The largest energy infrastructure company in North America

Canada's Enbridge operates the world's longest, most complex crude oil and liquids transportation system, with pipes in both the U.S and its home country. In 2019, it will transport 25% of all North American crude, including 63% of U.S.-bound Canadian exports. Its natural gas system is expected to transport 18% of all the gas consumed in the U.S., which it complements with one of North America's largest gas-distributing utilities. In addition, Enbridge controls an extensive portfolio of renewable energy assets in North America and Europe.

In 2019, about half of the company's earning will come from liquids pipelines, 30% from gas transmission pipelines, 15% from gas utilities, and the rest from other assets like renewable energy.

Enbridge played a pivotal role in building out the infrastructure to support the oil sands regions in Western Canada. Those investments grew its scale so that it could make needle-moving acquisitions such as 2017's purchase of gas pipeline-focused Spectra Energy, which catapulted it to the top of the pipeline leaderboard.

Enbridge should continue growing its infrastructure network for many years to come. In 2019, the company has 16 billion Canadian dollars ($12.2 billion at July 2019's exchange rate) of expansion projects under construction. Furthermore, it expects to invest CA$5 billion to $CA6 billion ($3.8 billion-$4.6 billion) per year on additional projects after 2020. Thus, the company should maintain its status as North America's largest pipeline company, baring a megamerger among its rivals. Its expansion projects should also supply it with steadily growing cash flow so that it can continue increasing its dividend.

Energy Transfer: The largest, most diversified MLP

Energy Transfer operates a fully integrated midstream platform. It boasts more than 86,000 miles of pipelines throughout the U.S. that transport natural gas, crude oil, natural gas liquids (NGLs), and refined petroleum products from all major supply basins to every leading market center in the country. It operates an extensive portfolio of processing, storage, and export facilities as well. Energy Transfer typically earns revenue via fees based on the volumes of product flowing through its systems, so it makes money at almost every stage as oil and gas move from wells to end users.

Energy Transfer's focus on operating fee-bearing assets limits its direct exposure to the volatility of commodity prices, enabling it to generate predictable cash flow. The company is distributing about half of its 2019 cash flow to investors via a high-yielding dividend and retaining the balance to fund expansion projects.

The company has grown through a combination of acquisitions and expansion projects over the years. While Energy Transfer initially focused on growing its natural gas infrastructure business, it diversified into all other aspects of the midstream sector. As a result, it now has the flexibility to pursue the highest-return opportunities to transport, process, store, and export any energy-related commodity. That combination of scale and diversification has helped the MLP grow into the largest in the space over the years. That trend should continue in the coming years as Energy Transfer leverages its strategically positioned asset base and sound financial profile to continue building and buying energy infrastructure assets. 

Enterprise Products Partners: Diversified, yet dominating its niche

Enterprise Products Partners has a diversified footprint and an integrated asset base. Its midstream portfolio consists of natural gas, NGLs, oil, petrochemicals, and refined products pipelines, as well as storage facilities, processing plants, and export terminals. Because of its diversification and integration, a given energy molecule will typically pass through five to seven of its assets en route to an end user, and Enterprise collects a fee for each one.

The company is particularly dominant in the NGL infrastructure segment. In 2018, it generated half of its earnings from services tied to those commodities, and hauled in another 13% of its profits from petrochemical-related activities, which typically consume NGLs. 

The broader industry needs to invest more than $50 billion on new NGL-related infrastructure through 2035, and that demand will provide Enterprise with plenty of growth opportunities. Add that to its diversification, and this MLP should be able to continue increasing its cash flow and high-yielding distributions for many years to come. 

TC Energy: Canada's gas infrastructure giant

TC Energy, formerly known as TransCanada, is one of the largest gas pipeline companies in North America. In 2019, it will transport 25% of the continent's volumes, not only in its home country but also in the U.S. and Mexico.

It also operates a large-scale oil infrastructure business in the U.S. and Canada, highlighted by the Keystone Pipeline System, which moves 20% of Western Canadian crude exports to U.S. refining markets. It complements this portfolio with a large-scale electricity generating business, which includes a major nuclear power plant.

TC Energy gets more than half of its earnings from its natural gas pipeline businesses, which it built through a series of expansion projects and acquisitions. It started out by constructing the TransCanada pipeline -- now known as the Canadian Mainline system -- which is the longest gas pipeline system in Canada. It went on to acquire other companies, as well as to invest in expansion projects in Canada, the U.S., and Mexico. Its largest deal came in 2016, when it bought Columbia Pipeline Group, which significantly bolstered its U.S. operations to the point where they are now the largest contributor to its earnings.

TC Energy has CA$30 billion ($23 billion) of secured expansion projects as of 2019, providing it with highly visible earnings growth through 2023. In the meantime, it has more than CA$20 billion ($15.3 billion) of additional expansions under development. As these and other projects enter service, they'll boost the company's cash flow so that it can continue increasing its dividend.

Kinder Morgan: North America's leading gas infrastructure company

Kinder Morgan operates the largest gas pipeline system in North America, transporting 40% of all the gas consumed in the U.S. Its pipelines connect to every major supply basin and demand center.

It's also the largest transporter of refined petroleum products and carbon dioxide, as well as a major crude oil and NGL shipper. On top of that, it operates a large-scale storage terminal business and produces oil, mainly by injecting carbon dioxide into legacy fields to boost output.

Kinder Morgan's gas infrastructure segment is its biggest moneymaker -- it's forecast to account for 61% of 2019's earnings. The company has an extensive network of pipes in places like Texas and Louisiana that connect fast-growing producing regions like the Permian Basin and Haynesville shale to chemical plants and liquefied natural gas (LNG) export facilities near the coast.

The company's strategic focus on natural gas pipelines, especially in Texas and Louisiana, puts it in a strong position to secure expansion projects. As of the middle of 2019, Kinder Morgan had $5.7 billion of expansion projects under way, roughly 80% of which were gas infrastructure related.

It should have no problem securing additional projects in the coming years. For starters, the INGAA Foundation estimates that North America will need to spend $23 billion annually on new gas infrastructure through 2035 to support expected growth in production and demand. Among the biggest drivers of that demand will be new LNG and petrochemical plants in Louisiana and Texas -- Kinder Morgan expects them to account for 70% of the increase in consumption through 2030. Because of that, Kinder Morgan is highly confident that it can secure $2 billion to $3 billion of new expansion projects per year, which would support 4% annual earnings growth at a minimum, and allow it to increase the dividend for many years to come.

A stack of pipelines with a blue sky in the background.

Image source: Getty Images.

Williams Companies: Focused on gas

Williams Companies is a major natural gas pipeline operator, handling 30% of America's volumes in 2019. The crown jewel of its portfolio is the Transco system, which is the largest interstate gas pipeline network in the U.S. by volume. The roughly 1,800-mile network moves gas between South Texas and New York City, serving markets all along the Atlantic Coast. Williams has invested heavily to expand that system's capacity over the years, nearly doubling it from 8.5 billion cubic feet per day (BCF/d) in 2009 to 16.7 BCF/d in 2018. It aims to get Transco up to 18.9 BCF/d by 2022 via continued expansion.

In addition to Transco, Williams operates a leading natural gas gathering and processing business in the fast-growing Marcellus and Utica shale regions. Its footprint in those areas has the business on track to grow the volumes it gathers at a 10% to 15% compound annual rate through at least 2021. Because of that, it will need to continue expanding so that it can move gas from these newly drilled wells to systems like Transco.

This integration between aggregating supply and then transporting it to demand centers should enable Williams Companies to grow earnings at a 5% to 7% annual rate over the long term, which should support steady dividend increases. 

MPLX: The ever-evolving MLP

MPLX started out as a subsidiary of refining giant Marathon Petroleum created to own, operate, develop, and acquire midstream infrastructure. Initially, Marathon grew its MLP by dropping down its logistics assets. However, MPLX has evolved over the years into a more self-sustaining company by investing in organic expansion projects and making third-party acquisitions. 

Those actions transformed it into a full-service midstream company that not only provides logistics services to Marathon's refineries but also offers a "wellhead to water" solution for other producers. The company's integrated network enables drillers to transport their production from wells to export facilities along the Gulf Coast. 

MPLX has focused on expanding its footprint in the fast-growing Permian Basin. The company did this by merging with an MLP that Marathon acquired as well as investing in growth projects. These investments allowed MPLX to increase its cash flow as well as expand its export capabilities. With ample growth ahead in the company's operating areas, it should be able to continue increasing its high-yielding distribution in the years to come.

ONEOK: Focused on making and moving NGLs

This year, ONEOK is on track to derive 60% of its earnings from operating NGL infrastructure. Its systems connect natural gas processing plants to NGL separation facilities, which then move purified products like ethane and propane to customers such as petrochemical plants. The company also gathers and processes raw natural gas (a business which accounts for 25% of its earnings) and operates natural gas transmission pipelines (the other 15% of its earnings).

One factor that has helped drive ONEOK's growth over the years has been its focus on the oil-rich Bakken shale of North Dakota. However, instead of building crude oil infrastructure, it focused on solving a critical problem in that region: how to maximize the value of all the associated natural gas that is produced along with oil. Drillers had been flaring (burning off) much of this gas due to a lack of infrastructure to capture it. That was not only costing them money, but it also was terrible for the environment. So, ONEOK built natural gas gathering systems and processing plants to capture the liquids-rich gas. It then extracts NGLs from the gas, and ships both products out on separate systems. ONEOK's infrastructure has helped reduce the volume of gas flared in the region from 35% in 2014 to around 15% in 2019, even as output nearly tripled.

ONEOK has more than $6 billion of projects under construction in 2019, most aimed at capturing and processing liquids-rich natural gas in North Dakota and other fast-growing production regions like the STACK/SCOOP play in Oklahoma. These projects have the company on track to grow earnings at a healthy rate through at least 2021, which should give it the fuel to continue increasing the dividend.

Pembina Pipeline: Focused on western Canada

Pembina operates an integrated system in Western Canada. Its network moves bitumen produced from oil sands production facilities, crude oil from conventional wells, and NGLs and natural gas from unconventional shale wells. The company also owns stakes in two natural gas pipeline systems in the U.S.

It's the largest third-party gas processor in Western Canada, and has the most capacity to fractionate raw NGLs into pure ethane, butane, propane, and natural gasoline. These businesses are a natural extension of its pipeline operations.

Pembina Pipeline has focused on providing gas services to drillers in Canada's liquids-rich shale formations such as the Montney and Duvernay. That has enabled the company to process more natural gas, which has increased its liquids output, proving opportunities to expand its pipeline network. For example, Pembina has steadily increased the capacity of its Peace Pipeline -- which transports liquids -- due to its focus on providing gas services to Canada's shale drillers.

In 2019, the Canadian energy infrastructure operator has CA$5.5 billion ($4.2 billion) of expansion projects under construction and more than CA$10 billion ($7.7 billion) more under development, including an LNG export project and associated pipeline on Oregon's coast. As Pembina builds these and other projects, it should be able to continue growing its dividend, which is one of the few that is paid out to investors monthly as opposed to quarterly.

Plains All American Pipeline: The oil pipeline MLP

Plains All American Pipeline operates a large-scale oil-focused infrastructure business. Its crude oil network ranges from Western Canada to the U.S. Gulf Coast and includes a meaningful position in the rapidly expanding Permian Basin. The company complements those assets with NGL pipelines and storage terminals as well as some natural gas storage assets.

The MLP typically signs long-term, fee-based contracts with customers for space at its assets, which provide it with predictable cash flow to support its high-yield distribution. It also retains some cash to fund expansion projects.

According to an estimate by the INGAA Foundation, a pipeline industry group, companies need to invest $321 billion by 2035 on oil-related infrastructure. A substantial percentage of that spending will be on building more infrastructure in the Permian Basin to support producers' ability to double that region's output by 2025. That plays right into the strengths of Plains All American, setting it up for significant growth in the coming years. 

These stocks grew into the biggest by first focusing on dominating their niche

The largest pipeline companies didn't get that way by building and buying new pipes randomly. Instead, they focused on constructing integrated systems to serve specific parts of the market. Each was then able to leverage that scale to diversify into other areas. And that strategically focused growth has enabled many of them to produce market-beating total returns.


Matthew DiLallo owns shares of Enbridge, Enterprise Products Partners, and Kinder Morgan. The Motley Fool owns shares of and recommends Enbridge and Kinder Morgan. The Motley Fool recommends Enterprise Products Partners and ONEOK. The Motley Fool has a disclosure policy.

This article was originally published on Fool.com