3 Pipeline Stocks Getting Bigger Without Taking on More Risk
Key Points
Kinder Morgan is the largest natural gas pipeline company in the U.S.
Williams has arguably the most valuable pipeline system in the country with Transco.
Energy Transfer's position in the Permian set it up to be a big natural gas pipeline winner.
- 10 stocks we like better than Energy Transfer ›
One of the biggest bottlenecks in artificial intelligence (AI) data centers is access to power. That is good news for natural gas pipeline companies, which help supply the fuel to the utilities and sometimes directly to the data centers themselves to power AI infrastructure.
Three of the best-positioned companies that are seeing strong growth in this area without taking on outsized risk are Energy Transfer (NYSE: ET), Williams Companies (NYSE: WMB), and Kinder Morgan (NYSE: KMI). Let's take a closer look at these three pipeline stocks.
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Kinder Morgan
Kinder Morgan operates the largest natural gas pipeline network in the U.S., spanning around 58,600 miles to go along with another 6,800 miles of gathering lines. In total, it transports approximately 40% of the natural gas in the U.S.
The company currently has a backlog of $9.6 billion in growth projects, of which about $8.8 billion are natural gas projects. Kinder is getting less than 6 times earnings before interest, taxes, depreciation, and amortization (EBITDA) build multiple for its projects, which equates to around $160 million in incremental EBITDA based on its current backlog. It expects to spend over $3 billion a year in growth capital expenditures (capex) over the next several years.
Kinder, meanwhile, is in good shape financially. It's reduced its leverage to 3.8 times (net debt/adjusted EBITDA), which is down from 5.1 times at the end of 2017. Meanwhile, 65% of its cash flows are covered by contracts with take-or-pay provisions, meaning it is paid regardless of whether customers use its pipelines or services.
For investors looking for a safe play on the AI infrastructure boom, Kinder is a great option.
Image source: Getty Images.
Williams Companies
With arguably the most valuable natural gas pipeline system in the U.S., Williams is another strong option in the pipeline space. The company's prized asset is the Transco Pipeline System, which traverses the southeast U.S., going from Appalachia down to the Gulf Coast. Transco is the pipeline system that just keeps on giving, as Williams has 10 expansion projects with in-service targets between 2027 and year-end 2030.
The company is more than just Transco, however, transporting more than a third of the country's natural gas through 32,000 miles of pipelines. It also has a nice set of projects in the Mountain West and Northwest. Williams is also supplying data centers with turnkey power solutions that include gas supply, pipelines, and power generation. It is involved in six of these projects totaling $9.6 billion. In total, Williams plans to spend up to $7.9 billion in growth capex this year.
The company is also in solid financial shape, with leverage of 3.8 times, which is expected to remain around that level following its acquisition of Momentum. It is also projecting 11% or more compounded annual EBITDA growth through 2030, making it one of the strongest growth companies in the space and a top growth stock in the sector to own.
Energy Transfer
If you're looking for a pipeline operator with a great combination of growth and high yield, Energy Transfer is one of your best options. The master limited partnership (MLP) is one of the largest midstream companies in the country, with a vast integrated pipeline system spanning approximately 140,000 miles, transporting natural gas, NGLs (natural gas liquids), crude, and refined products.
Energy Transfer is very well positioned in the prolific Permian Basin, giving it access to some of the lowest-priced natural gas in the country. It has a strong backlog of natural gas projects with expected EBITDA build multiples of between 5 and 6 times. Its two largest projects divert natural gas from the Permian to serve data centers in Texas and the burgeoning markets of New Mexico and Arizona. In total, it plans to spend up to $5.9 billion in growth capex this year.
The stock currently carries a yield of 6.8%, with a well-covered and growing distribution. Between its growth and yield, this makes it a top high-yield dividend stock to own.
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Geoffrey Seiler has positions in Energy Transfer. The Motley Fool has positions in and recommends Kinder Morgan. The Motley Fool has a disclosure policy.
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