Energy Investing: Midstream

This article is part of our Energy Investing series.Click back to the series introductionto learn more and access easy-to-follow links to the entire series.

The oil and gas industry presents plenty of ideas for investors in need. There are so many options that, really, entire portfolios can be built to reflect the process of extracting commodities from the ground and turning them into an end product that people use every day. While I'm not suggesting you actually do that, I am suggesting taking a closer look at energy from start to finish and evaluating the best stocks for your current portfolio.

We've already tackled exploration and production and oilfield services, so let's move on to midstream companies. Without these toll roads and processing centers, energy never makes it to market, and that kind of industry dependency makes them a compelling add to any portfolio.

State of the industry
The midstream industry is characterized by two important issues right now. First is a strain on existing infrastructure. Many of the pipelines in the U.S. are aging -- 60% of our natural gas pipelines were laid before 1970 -- and in many regions, existing infrastructure simply isn't enough. In the Bakken shale oil play of North Dakota, there is no pipeline capacity to bring natural gas to market, and the capacity that exists to bring oil to market isn't sufficient.

This reality is a great opportunity for midstream growth; however, the second of our two issues may get in the way of that. There is increasing backlash against pipeline development, in both the U.S. and Canada. Midstream companies are no longer getting an automatic green light to build out infrastructure. Perhaps the most famous of this example is TransCanada's Keystone XL project, but TransCanada isn't the only company that is facing opposition.

Hot spots
Without a doubt, onshore North America is the primary focus of midstream companies today -- in particular, the Canadian routes that begin in Alberta and go anywhere. The source of the energy, the bitumen sands, is causing a great deal of trouble for the midstream industry. Environmentalists don't want the sands developed, and citizens don't want the heavy, sticky oil flowing through a pipe in the ground, just in case something happens.

This issue alone has recently blocked or slowed no fewer than three major pipeline projects: the aforementioned Keystone XL, and Enbridge's Northern Gateway and Trailbreaker projects. Kinder Morgan is attempting to fly under the radar to double the capacity of its TransMountain pipeline, which already brings oil from Alberta to the coast of British Columbia.

Moving south from Canada, midstream is booming in the Bakken of North Dakota, the Texas oil shale plays like the Eagle Ford, and the Marcellus and Utica shale gas plays in the Northeast.

Overall, it is impossible to tout the growth of this sector enough. Analysts estimate that over the next 25 years, we will need to add 43 billion cubic feet of capacity to our midstream network, at a cost of about $8 billion annually.

Forty-three billion cubic feet is a tall order. Here are five of the players working on the dream:


2011 Revenue (in billions)

Performance YTD


Kinder Morgan Energy Partners




Enterprise Products Partners




Enbridge Energy Partners




Plains All American Pipeline




Energy Transfer Partners




Sources: Yahoo! Finance, YCharts.

The word "partners" appears so often in the above chart because many midstream companies are structured as master-limited partnerships. As MLPs, all of the companies above are set up in a tax-advantaged manner. Profit flows through the company, straight to the unit holder untaxed. The unit holder is then required to pay taxes on their share of the MLP's income. In the end, it means a little extra paperwork, but it can very much be worth it.

Foolish takeaway
Chances are there is a midstream company that's just right for your investing needs. Checking in with our CAPS community and utilizing the Fool's My Watchlist service are both great ways to do more research to narrow down the choices for your portfolio.

As midstream advances bring more gas to market, tangential plays will become more and more popular. Get a head start on the market with a small company Fool analysts recommend for interested investors.