Pipeline and Midstream Stocks

About Pipeline and Midstream Stocks

Pipelines are the income part of energy and the part least exposed to the commodity. Most of the revenue is a fee for reserved capacity, paid whether or not the shipper uses it, which makes this closer to a toll road than to an oil bet. Yields are high, cash flows are contracted, and the assets are close to impossible to replicate because nobody is getting a new long-haul pipeline permitted easily.

That permitting difficulty is the moat and the ceiling at once. Existing lines are enormously valuable precisely because new ones are so hard to build, but it also means growth has to come from acquisitions, expansions of what already exists, or export terminals rather than from new routes.

One structural point to check before buying. Several of these are partnerships rather than corporations. They pay distributions instead of dividends, send a K-1 instead of a 1099, and can create tax complications inside a retirement account. They are also measured on distributable cash flow rather than earnings per share, so screening them on a normal P/E produces nonsense.

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