Dear Mr. Berko: I read your column on pipeline stock risks, and I wonder whether you’re too partial to them. I know that some of these issues have attractive yields. We have $31,000, about 11 percent of our assets, that we can afford to risk, and we want to get the highest possible yield we can. Four years ago, you recommended five high-yielding business development stocks paying over 11 percent. We invested $21,000, and they have done really well. So are there any high-yield pipeline stocks you’d recommend that can give us a 10 to 12 percent dividend yield? What do you think of the four pipeline stocks I’ve enclosed?
— D.K., Fort Walton Beach, Fla.
Dear D.K.: I’ve been partial to pipeline master limited partnerships for a long time, probably since about 80 B.C.; and they may be among the most underappreciated, misunderstood growth and income issues available on any table. Though not grand-slam candidates, pipelines as long-term investments produce consistent singles, frequent solid doubles, a few triples and, during the sector’s rotation cycle, a potential home run if you get lucky. And some folks have! So as Maximus Profitus, director at Goldman Sachs, would say: “Illud iterum dicere potes!”
Because of the uniqueness of this investment sector, I’d approve of growth portfolios that are 10 to 15 percent weighted in pipeline MLPs, growth and income portfolios that are 15 to 25 percent weighted in pipelines, and income portfolios that are weighted up to 35 percent. Oil and gas will be around for a long time, and pipelines are the least costly, safest and most efficient method of transporting oil and gas from the producer to the refiner. For example, transporting oil from the Bakken shale formation in North Dakota to refiners in Port Arthur, Texas, would cost about $8 a barrel, compared with $12 a barrel by rail today. The average railroad tank car holds a splash and sip over 30,000 barrels, and that $4 difference in costs equals $12,000 per tank car. Today the Bakken produces 1 million barrels per day, all of which is currently moved by rail to Texas. At $12 per barrel, the annual freight is $4.4 billion, which is figured into the cost of a gallon of gas at the pump. That cost, spread over billions of gallons, is no more than an eyedropper to the consumer, but those revenues are a waterfall for railroad income statements. And by 2017, the Bakken formation may be producing over 2 million BPD. So a pipeline moving 2 million BPD with almost zero carbon footprint, without danger of toppling tank cars at 3:10 a.m. and at $4 less per barrel, will save about $3 billion a year. And why not?
Pipeline stocks have many of the revenue, income and dividend characteristics of utility issues, and their function is equally necessary to our economy. However, because a pipeline’s depreciation schedule enormously exceeds its needs, pipelines pass that depreciation to the shareholder in the form of cash distributions (they’re not called dividends), which has the accounting effect of making them essentially nontaxable. Those distributions decrease your basis on the stock, so you’re eventually taxed the capital gains rate, but only when you sell the stock.
There are a number of pipeline MLPs that have 12 percent distributions, but they’d give most readers heartburn. Your Northern Tier Energy (NTI-$27.50) stock, with an 11.3 percent distribution, is probably the best of the worst of all of them. It’s an interesting MLP that also owns a profitable string of convenience stores and the only one of those four with which I am mildly comfortable. You know, of course, that a 7.5 percent nontaxable cash distribution (if you’re in the 30 percent bracket) is equal to a 10.75 percent taxable distribution. So the following pipeline MLPs will give you an equivalent 11 percent taxable distribution: Atlas Resource Partners (ARP-$19.60), with a 7.6 percent distribution, El Paso Pipeline Partners (EPB-$34.73), with an 8 percent distribution, and Marlin Midstream Partners (FISH-$19.95), distributing 7.6 percent, are worth owning as long-term investments. I must add Kinder Morgan (KMP-$78.70), which distributes 7.3 percent but has a taxable equivalent distribution of just a stinky 10.3 percent.