Investopedia: Can Pipelines Still Deliver The Goods?

In many respects, pipelines are great businesses for patient investors who like collect to dividends. They allow investors to leverage the growing demand for energy with far less exposure to commodity prices than is the case for integrated energy companies or exploration and production companies. Instead, they act as toll collectors with very little operating risk on a week to week basis.

The nature of the business also gives certain inherent advantage to these companies. It takes a great deal of capital to build networks of pipelines, terminals, storage facilities and the like, but once they are in place there is seldom much competition for their services. What's more, because the tax-advantaged MLP structure is so common in the space, these companies often pay substantial dividends (technically called distributions in most cases). (For more, see Power In Pipelines.)

The Downside
It is not all perfect in the industry, though. Because companies that opt for the MLP structure cannot retain any significant amount of their earnings, these companies must borrow extensively to meet their capital needs. So while these companies have clearly benefited from the low interest rate environment (which has also made the yields on these stocks quite attractive), the risk of higher rates is particularly significant here. That is all the more relevant when considering the fact that many companies are looking to expand their networks to better access areas like the Bakken and Marcellus Shales.

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