Exploring U.S. Natural Gas Dividends

Published Mon, 10 Sep 2012 09:00 CET by DividendYields.org

Natural gas-related stocks in North America have been a focus of investor interest in recent years due to a tremendous impact that the shale gas boom has had on the market for natural gas. The application of new technologies to access unconventional reserves of natural gas in shale rock formations has produced a surge in supply of natural gas (see first chart below). That supply spike caused a plunge in natural gas prices to multi-year lows earlier this year (see second chart below). Still, notwithstanding the current market dynamics, many predict that the clean-burning commodity will be the key energy source in the future, which should bode well for natural gas producers, transporters, processors and distributors.

Total U.S. Natural Gas Production, Consumption and Net Imports 1990-2035 Chart
While the near-term prospects for North American natural gas prices remain poor amid the burgeoning natural gas supplies – which means more pain for natural gas producers in at least the near term – investment opportunities abound to benefit from the shale gas boom – particularly for income investors. The demand for pipeline transportation, processing and storage of natural gas has been booming along with the surge in the natural gas supply that has made this commodity inexpensive in North America.

U.S. Natural Gas Wellhead Price Chart
Income investors can find plenty of natural gas-related companies and Master Limited Partnerships (MLP) operating midstream assets that provide attractive dividends and income. For natural gas income investors especially interesting are MLPs that operate the transportation infrastructure, such as pipelines and storage. Potential MLP income plays include Kinder Morgan Energy Partners LP (NYSE: KMP), Energy Transfer Partners LP (NYSE: ETP), Enterprise Product Partners LP (NYSE: EPD) and Williams Partners LP (NYSE: WPZ). All these MLPs are expanding their infrastructure, which will boost their revenue and earnings potential in the future.

Kinder Morgan Energy Partners LP is the largest independent owner and operator of petroleum product pipelines in the U.S. The company's natural gas transmission and gathering pipelines stretch across 16,200 miles. The MLP has a distribution yield of 6.0% and a payout ratio of 94% of last year's free cash flow. Kinder Morgan Energy Partners' distributions grew at a rate of 7.4% per year over the past year. The stock is up nearly 18% over the past year.

Energy Transfer Partners LP engages in the natural gas midstream and intrastate transportation and storage. It owns and operates natural gas gathering and transportation pipelines, processing plants, treating and conditioning facilities, and storage facilities. The MLP has a high distribution yield of 8.2%, with a payout ratio of 76% of trailing earnings. The MLP has kept its distribution at the current level since 2009. The stock is flat over the past year.

Enterprise Product Partners LP operates an extensive network of natural gas liquids, onshore, and offshore natural gas and related liquids pipelines. It also owns and operates terminal and storage facilities, leases and owns salt dome natural gas storage facilities, and markets natural gas. The MLP pays a distribution yield of 4.8% on a payout ratio of 92% of trailing earnings. Its distributions grew at an average rate of 5.8% per year over the past five years. The stock is up 28% over the past year.

Williams Partners LP, through its gas pipeline segment, owns and operates about 13,700 miles of pipelines. It also holds interests in joint ventures in the pipeline systems. Its midstream gas and liquids segment, with operations in the Rocky Mountains and Gulf Coast, as well as in the Marcellus Shale region, operates natural gas gathering, processing, fractionation, and transportation assets. The MLP has a distribution yield of 6.2% and a payout ratio of 76% of trailing earnings and 78% of free cash flow. The MLP's distribution grew at an average rate of 9.6% per year over the past five years. The stock is down 2.3% over the past year.


Of the four noted MLPs, Energy Transfer Partners LP and Enterprise Product Partners LP have capital expenditures larger than operating cash flows, which has driven their free cash flows deep in the red. As regards valuation, Williams Partners LP has the lowest forward P/E (15.9) of the four MLPs. This compares to a forward P/E of 17.3 for Energy Transfer Partners LP, 19.1 for the Enterprise Product Partners LP, and 31.2 for Kinder Morgan Energy Partners LP. Investors could also consider other midstream plays, including Atlas Pipeline Partners LP (NYSE: APL), which pays a distribution yield of 6.3%, ONEOK Partners LP (NYSE: OKS), with a yield of 4.7%, and Spectra Energy Partners LP (NYSE: SEP), yielding 6.0%. ONEOK Partners LP plans to invest up to $1.8 billion in infrastructure over the next three years, while Spectra Energy Partners LP plans to invest $1 billion a year over the next five years.

Update 13 October 2014: Targa Resources Partners LP (NYSE: NGLS) announced they have entered into agreements to acquire Atlas Pipeline Partners LP.

An interesting play on liquefied natural gas (LNG) exports to international markets where natural gas prices are much higher than those in North America is Cheniere Energy Partners LP (NYSE: CQP). In 2016, the MLP is expected to start commercial operations at a $10-billion LNG export plant, first of its kind. The company has a U.S. Department of Energy permission to export about 2.2 bcf of LNG per year. Cheniere Energy (NYSE: LNG) has secured $5.4 billion, including $2 billion from private equity firm The Blackstone Group LP (NYSE: BX) and contributions from China and Singapore's wealth funds, to start the first phase of construction on its export facility. The MLP pays a distribution yield of 6.6%. Its stock has risen 68.5% over the past 12 months.

Other income plays with an exposure to the natural gas market in North America include gas utilities, such as Sempra Energy (NYSE: SRE) and NiSource (NYSE: NI). Sempra Energy operates the largest gas distribution system in the United States, one of the largest storage facilities in the nation, a pipeline network and an LNG facility in Mexico. The stock pays a dividend yield of 3.7%. Its dividend grew at an average rate of 12.1% per year over the past five years. NiSource is a diversified utility that has benefited from lower natural gas prices. It is engaged in the transmission, storage and distribution of natural gas. The company pays a dividend yield of 3.8%.
Stock name Dividend Yield
Energy Transfer Partners 11.76
Blackstone Group Lp 9.87
Spectra Energy Partners Lp 7.42
Cheniere Energy Partners Lp 6.67
Enterprise Products 6.59
Williams Partners Lp 6.45
Nisource 3.31
Sempra Energy 3.00
Cheniere Energy 0.00

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