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A New Look at Energy Infrastructure

Master limited partnerships (MLPs) were the business structure of choice for the energy infrastructure/midstream business in the decade through 2014; growth came from developing new projects, funded with a combination of debt and equity, recalls sector expert Tim Plaehn, editor of The Dividend Hunter.

The energy sector crash blew up the MLP growth model and revealed some ugly features of the typical publicly traded partnership agreement.

The last four years have seen a massive restructuring of the companies operating in the energy midstream space. There are now a number of corporations instead of the partnership structure.

More from Tim Plaehn: Top Picks 2019: Antero Midstream (AMGP)

Balance sheets have been strengthened with companies focusing on using internally generated cash flow to fund growth projects. Onerous features of MLP partnership agreements have been abandoned. 

While share values have not recovered from the problems of recent years, the financial restructuring is basically completed, and these companies are on the verge of again generating attractive dividend growth and total returns for investors. Here are three stocks from the group that should do very well in 2019.

In 2014, Kinder Morgan Energy Partners was acquired by the corporate sponsor, Kinder Morgan Energy Inc. (KMI). The consolidation was not enough to prevent the carnage of the energy sector crash, as the share price fell from $43 to $12 in January 2016. It now trades at $17.40.

Over the last three years, the company reduced debt and built cash flow to internally fund growth projects. In April 2018 the dividend was increased by 60% to $0.20 per share.

See also: Bakken to Permain: Elliott Gue's Top Plays for Energy Gains

Management has stated the dividend will increase by 25% each year in 2019 and 2020. Free cash flow is currently $2.00 per share and growing, so the $1.25 annual dividend for 2020 is in the bag. The stock currently yields 4.6%.

In mid-2015 Magellan Midstream Partners LP (MMP) was an $83.50 per unit MLP. The units now trade for $62 and change. All of Magellan’s growth has been funded through internal cash generation, without the need to tap the equity markets.

Despite what the market price shows, the MMP distribution has been increased every quarter, and the current rate is up 42% compared to when it traded for $83.  With a 6.25% yield and continued 8% annual distribution growth, MMP could return 20% or more in 2019.

Tallgrass Energy LP (TGE) is the result of the 2018 merger of traditional MLP Tallgrass Energy Partners and the publicly traded general partner, Tallgrass Energy GP LP.

Through its life as a traditional MLP, Tallgrass Energy Partners was one of the top distribution growth companies in the sector. The merger with the general partner eliminates the payments the MLP was paying to the GP. This means lower expenses and more cash to continue the distribution growth record.

Tallgrass owns and operates one of the largest crude oil and natural gas pipeline networks in the country. Dividends could grow at a mid-teens per year rate. With a current 8.6% yield, TGE is grossly undervalued and could double in 2019.

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