Everyone loves a good turnaround story -- especially when the business in question isn't fundamentally going anywhere anytime soon. Case in point: Kinder Morgan -- the largest pipeline and energy infrastructure operator in North America. Kinder Morgan has, arguably, cut its dividend and seen its share price languish amid an industry downturn and a seizing up of capital markets -- not due to a fundamental decrease in its earning power.
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However, the downturn itself has forced KMI to play defense, while a number of its peers have continued to pay uncut dividends to partners while expanding operations. Enter Buckeye Partners, L.P. with its 6.7% dividend yield and a unique hedge to protect it should energy markets continue their oversupplied state. Here's what Foolish investors need to know.
No, they're not just a pipeline in Ohio
While Buckeye Partners has its beginnings as part of the Standard Oil Company of Ohio over 100 years ago, its 21st century form operates out of its headquarters in Houston, TX. Bukeye owns and operates some 6,000 miles of pipelines in the Northeast and Midwest U.S., as well as 117 liquid petroleum products distribution terminals. As a matter of fact, it is one of largest integrated networks of marine terminals in the East and Gulf Coast regions of the U.S., with a newly acquired major hub in the Caribbean as icing on the cake.
These assets have continued to generate enough cash to pay the company's sizable dividend and support its debt load, giving it an operational edge over bigger peer Kinder Morgan:
Buckeye Partners, L.P.
Source: S&P Capital IQ
Source: S&P Capital IQ
As we are all aware, Kinder Morgan made the fateful decision to cut its dividend in late 2015. While this was probably a smart move, Buckeye Partners has continued to send partners their quarterly dividend checks thanks, in part, to a more conservative balance sheet and a unique advantage that makes BPL a unique "hedge" in today's energy paradigm.
110 million barrels of oil on the wall
The buzzword inevitably tied to any discussion of the energy market for the last 20 months has, of course, been "glut." There's simply too much oil being produced right now, thanks to the advent of U.S. shale oil production and counterproductive infighting within OPEC. This situation has produced some unique side effects, particularly for those that transport and store oil.
As previously mentioned, Buckeye Partners also happens to operate a storage business in addition to its 6,000 miles of pipelines. This division has actually been a major source of investment by Buckeye's management, as it spent $850 million to acquire what is now the Buckeye Bahamas Hub in the Caribbean in 2012. Buckeye's Baltimore facilities have recently been refurbished and brought back on line as well. All told, these initiatives give the partnership over 110 million barrels of oil storage capacity. First quarter utilization of these tanks was 99%, up from 91% in Q1 2015. While these conditions won't last forever, it does give Buckeye a unique edge over the competition as well as increasingly strong pricing power as those looking to store their oil have fewer places to turn.
Foolish final thoughts
Both Kinder Morgan's and Buckeye Partners futures are likely bright -- it's hard to see otherwise given their near monopolistic business models. However, Kinder Morgan offers investors a relatively paltry 2.67% dividend yield (and sizable capital appreciation potential if and when the dividend returns to its former glory), whereas Buckeye Partners is going strong with expansion plans all while offering a 6.9% yield in the here and now.
To boot, Buckeye has sizable expansion plans in its Chicago complex, as well as its Corpus Christi and New York Harbor terminals all of which will continue to support dividend growth in the years ahead. Kinder Morgan also has expansion plans, but guessing as to when it's previous $0.50 per share quarterly dividend will return is a (lower case) fool's errand. For those investors looking for sizable dividends in the present, Buckeye Partners might just be the way to go.
The article Like Kinder Morgan? Then You'll Love This Stock originally appeared on Fool.com.
Sean O'Reilly has no position in any stocks mentioned. The Motley Fool owns shares of and recommends Kinder Morgan. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.
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