Midstream and downstream oil and gas stocks have slid somewhat under the radar this summer, as the big boys took center stage in the aftermath of the big oil price run-up of 2011. But that doesn’t mean there aren’t midstream stocks, funds, and partnerships worthy of a savvy investor’s attention.

Wall Street wise guys have long held that midstream oil and gas companies are a good, solid hedge against volatile commodity prices. According to Raymond James vice president Darren Horowitz, midstream master limited partnerships, especially the pipeline and storage companies, are a good way for skittish investors to play the oil and gas side of the financial markets. Any direct moves into the market runs the risk of increased commodity price volatility and frequent supply variations, he says. But that’s not as likely for limited partnerships.

“From a volume perspective, several midstream operators run fee-based assets; however, they may have either minimum volume commitments, MVCs, or other contractual provisions that mitigate volume volatility,” Horowitz explains. “These contracts generate fees regardless of the actual capacity utilized on the asset or the volume that flows through the asset.”

In a word, a master limited partnership (MLP) is a partnership that is publicly traded on the financial markets. Such partnerships merge the tax structure of limited partnerships with the liquidity of publicly traded securities. MLPs often offer income in the form of dividend payouts to investors-- a big attraction to anxious investors these days.


$220 Billion Market Cap

The total market capitalization of the top midstream oil companies is about $220 billion-- approximately 1.5% of the total U.S. stock market (with a market cap of about $15 trillion).


Five Midstream Plays the Professionals Like

Investment pros have some midstream firms they fancy. Here’s a look:

Enterprise Products Partners (Stock Quote: EPD)--This was a particular favorite of Horowitz back in the spring, and still looks strong today. He says that EPD has one of the lowest costs of capital among midstream operators, and the kind of steady balance sheet that allows the company to freely pursue growth opportunities without worrying about absorbing too much risk.

“When you think about best connecting the areas of the most prolific supply with areas of the greatest demand, Enterprise Products Partners is at the forefront,” Horowitz says. “They own/operate over 50,000 miles of pipeline that helps transport natural gas, natural gas liquids, crude oil and refined products.”

Martin Midstream Partners (Stock Quote: MMLP)-- If you want to know if a given stock is really moving, watch what the company insiders do. We can’t give you the so-called “good news” on Martin Midstream Partners, but there is some corporate insider buying activity taking place. The Motley Fool reports that in a recent 30-day period, four insiders bought up shares of MMLP stock. The amount purchased was only $27,000 worth--and MMLP has a market cap of $798 million--but four purchases in 30 days is, as they say at Wall Street watering holes, a trend. The company also boasts a higher-than-average dividend rate at 7.6%.

Sunoco (Stock Quote: SUN)--Domestic oil refineries are having a banner year, as huge stockpiles of oil are being moved out of the American Midwest. Consequently, the outlook for U.S. oil refiners like Sunoco is a bullish one, as analysts expect the U.S. crude oil market to remain relatively strong through 2015. But in the short term, Sunoco may even be a stronger play. Its recent initial public offering on its SunCoke Energy spin-off--11.6 million shares strong--was deemed highly successful by investment-industry insiders. Sunoco recently adjusted the amount of money it could raise with the SunCoke IPO--from $100 million in March, to $227 million in July--according to the company’s registration statement with the U.S. Securities and Exchange Commission.

EQT Corp. (Stock Quote: EQT)--At the beginning of 2010, 12 of the 14 Wall Street analysts tracking EQT (86%) were bullish on the stock, each recommending a Buy action. The other two advised investors to Hold--making it a clean sweep as far as anyone advising selling the stock. More than six months later, how is EQT doing? The oil and gas company, which specializes in production, midstream and distribution operations, has rewarded shareholders with a big boost in its stock price--from $45 per share in January to $62 per share in July.

Williams Partners LP (Stock Quote: WPZ)--Williams Partners specializes in natural gas transportation, especially the gathering, treating and processing, storage, and natural gas liquid fractionation businesses in the U.S. It also has a significant oil transportation operation. Oklahoma-based Williams' dividend yield averages about 5.2%. Also, the track record is definitely there.

What’s not to like in the midstream market these days?