Investing in master limited partnerships (MLPs) has long been known - and loved - as a reliable income source.
MLPs generate stable cash flow by charging user fees for the transportation of oil, gas, and other fuels through pipelines and other energy infrastructure.
Income generated by investing in MLPs has doubled over the last decade, with distributions increasing at an average rate of 7.6% a year.
What's more, MLP distributions in 2014 are set to rise by 9%, according to Morgan Stanley.
But Leonard Edelstein of Yorkville Capital Management, a firm that focuses on energy MLP exchange-traded funds, thinks that figure might be too conservative thanks to the U.S. shale boom.
The explosive growth of U.S. shale gas and oil production will necessitate an enormous investment on the part of MLPs on infrastructure, estimated at an additional $250 to $350 billion over the next 20 years.
Edelstein told the Financial Times the MLP sector could easily deliver 10% to 15% annual gains over the next several years.
And this leads us to one of the best picks for investing in MLPs to profit from this growth spurt.
One of the Best MLPs to Buy Now
To hunt for the best MLPs to buy, Money Morning's Global Energy Strategist Dr. Kent Moors favors the midstream energy sector, which sits in the sweet spot between upstream (exploration and production) and downstream (refining and distribution). Midstream assets include pipelines, storage facilities, and refineries.
And in the midstream sector, one of the best MLPs to buy is Markwest Energy Partners LP (NYSE: MWE). Markwest, with a dividend yield of 4.87%, is involved in the gathering, processing, and transportation of natural gas.
Markwest is the largest processor of natural gas in the booming Marcellus Shale region, in addition to the Huron/Berea Shale in Appalachia. It has also expanded its presence in other major U.S. natural gas plays like the Woodford and Haynesville shales.
In a recent conference call, Markwest executives stated that their goal was to become the biggest midstream services company in the U.S. natural gas industry.
And so far, management has done a good job - the company's stock is up nearly 37% year to date.
But more gains are on the horizon for Markwest Energy...
Markwest Energy's Winning Strategy
First, Markwest has a strong presence in the Marcellus Shale, the fastest-growing natural gas region of the country.
The U.S. Energy Information Administration more than doubled its gas reserves estimate for the Marcellus to nearly 32 trillion cubic feet, according to a study released in August. This represents a quarter of all U.S. gas reserves.
Second, Markwest Energy's close relationships with natural gas producers may propel it forward in the months to come.
For example, Markwest services a number of firms in the fast-growing Marcellus and Utica shale regions. These companies include Chesapeake Energy Corp. (NYSE: CHK), CONSOL Energy Inc. (NYSE: CNX), and Antero Resources Corp. (NYSE: AR), which had an initial public offering (IPO) in October.
Having good working relationships with rapidly growing companies gives Markwest a definite edge. CONSOL, for example, has already increased its Marcellus production thus far in 2013 more than 70% from last year and raised its guidance for 2014.
Thanks to these relationships, Markwest is building more and more infrastructure to handle all of the natural gas being produced.
In early November, Markwest opened the 200 million cubic feet per day facility at the Majorsville complex in West Virginia to handle gas from Chesapeake Energy. At the same complex next month, it will also open its second de-ethanizer, which is key to ethane production.
It also recently started operations on its first cryogenic plant at its Seneca complex in Ohio in the heart of the Utica region.
This complex is anchored by Antero Resources, which is flush with cash from its recent IPO. CONSOL and other energy firms are also involved. This plant will process 600 million cubic feet a day of natural gas by the second quarter of 2014.
More expansion in the Marcellus and Utica regions is planned. This should provide a nice avenue for Markwest Energy Partners to continue growing in the foreseeable future, making it one of the best choices for investing in MLPs now.
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