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The Cash-Rich Center of the Energy Sector

by | Nov 2, 2023

What a week for the markets as they continue to scream out of oversold, correction territory from last week. There’s a short-term celebration as interest rates are dropping and sectors are turning green after a multi-week sell-off. 

I’m not convinced the markets are done with their downside for the year — as this squeeze higher is very similar to the short rallies we saw to start September and October. But we now have 4,400 in our sights for the S&P 500. 

This is a headline, data-driven market — and the whipsawing can be exhausting, especially after the last 18 months. But if you’re looking for a place to park cash and tap into the rich upside of the Energy sector, let’s continue our conversations from earlier this week… and tap into the Midstream portion of the Energy sector. 

Let’s get started…

The Midstream is the portion of the energy supply chain that connects production sites to downstream facilities like refineries. These companies act like toll bridge operators for a large number of pipelines, trains, ships and trucks. By moving crude oil and natural gas across the supply chain, these midstream operators receive fees that help offset the volatility of oil and other energy fuel prices. 

The U.S. pipeline network is expansive. There are roughly 2.4 million miles of pipelines in the nation for natural gas transfer and storage. In addition, there are nearly 200,000 miles of liquid petroleum pipelines.

In addition to moving crude through these pipelines, companies also receive fees for services related to storage and processing. If you follow updates from the American Petroleum Institute and the Energy Information Administration, both groups provide weekly updates on the amount of crude oil and natural gas that’s being stored. 

As a result, energy prices will fluctuate based on the amount of commodities that are stored, since they are a predictor of supply in the system against expected demand. Ultimately, these fuels are moved downstream to the refineries, where they are processed into byproducts like gasoline or lubricants. Oil byproducts are also used in nearly every product in your home — from furniture and electronics to the plastic containers in your refrigerator. 

One of the reasons why this part of the supply chain is so attractive to investors is the reliable streams of cash flow. Pipeline operators and fleet companies will sign long-term contracts with producers and refineries to move these commodities through their networks all day, every day. This ensures reliable income streams for investors who might be concerned about changes in broader crude oil and natural gas market conditions.

Money in the Midstream

If you’re looking to get started in the midstream sector, there are a few players that we’ve tapped into at Tactical Wealth Investor. But I’m happy to make a recommendation for the long term for anyone looking to build real wealth in this critical sector. 

Enterprise Products Partners (NYSE: EPD) is a publicly traded master limited partnership (MLP) headquartered in Houston, Texas. It was founded in 1968 and has since grown into one of the largest and most prominent midstream energy companies in America.

The company has increased its distribution for 25 consecutive years, and has generated double-digit return on invested capital (ROIC) for 18 consecutive years. 

Enterprise Product Partners is an MLP, which means that it has a different structure than most public corporations. Because it generates the bulk of its income from its pipeline assets, it is able to structure as a partnership that pays its limited partners a sizable amount of its generated cash flow in the form of distributions. 

Based on this structure, the company bypasses corporate income taxes, and issues these distributions alongside a K-1 tax report. The income is reported as ordinary income on a shareholder’s tax return. This structure enables the company to pay a higher distribution than many other energy companies in the supply chain. 

EPD currently pays a 7.5% distribution, and will remain a leader in the transportation space for oil and gas for a long time. If you want to tap into another energy name that is in the value space, join me at Tactical Wealth Investor, and I’ll unveil it on Monday.

Chat soon,

Garrett signature



Garrett Baldwin

*This is for informational and educational purposes only. There is an inherent risk in trading, so trade at your own risk. 

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WRITTEN BY<br>Garrett Baldwin

Garrett Baldwin

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