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Must-Own Stocks of 2013: Why KMI and ETE Are Cash Magnets

On Tuesday, we caught up with Cheniere Energy (LNG) – a stock that’s soared about 50% since we named it one of the Must-Own Energy Stocks of 2013.

Today, we’re going to look at two pipeline companies we recommended – Energy Transfer Equity (ETE) and Kinder Morgan Inc. (KMI).

We’ll start with the high-flying ETE, which is up 42% since our recommendation. That leaves it second only to Cheniere, in terms of performance.

That’s quite a run, but there’s still plenty more where that came from, and I’ll tell you why…

Cooking With Gas

ETE is a pipeline magnet.

Through its subsidiaries – Energy Transfer Partners LP (ETP) and Sunoco Logistics Partners (SXL) – the company controls 44,000 miles of natural gas pipeline, capable of carrying 30.7 billion cubic feet of gas per day. That’s almost half of the average daily U.S. consumption.

It also owns and operates natural gas storage facilities and sells natural gas to electric utilities, independent power plants, local distribution companies, industrial end-users and other marketing companies.

ETE owns oil and natural gas liquid assets, as well, but it really benefits as the point man for U.S. natural gas distribution. That’s a fine thing to be, considering fracking has unlocked a huge amount of natural gas in the United States.

Indeed, both natural gas production and consumption hit new all-time highs in 2012. The last time that happened was 1972. And with more power plants switching from coal to natural gas, that trend is likely to continue well into the foreseeable future. In fact, natural gas is so clean, cheap and abundant, it could soon replace gasoline in cars.

Now, the thing about ETE is that it transports and stores natural gas – it doesn’t produce it. So volume is what matters, not the price of natural gas. And with production and demand booming, midstream business is better than ever.

Seriously.

ETE reported net income of $127 million for the second quarter, up 135% from $54 million last year. Revenue surged to $12.06 billion from $1.88 billion.

So is it any wonder the stock has cruised steadily higher?

Furthermore, it yields a respectable 4% and it continues to increase its payout.

Bottom line: ETE is a dominant player in a fast-growing segment. It’s got size, growth and yield. There’s really not much more you can ask for.

And speaking of size, growth and yield, let’s turn our attention to KMI.

Long Live the King

KMI hasn’t had the performance ETE has had, but it’s done alright for itself.

It’s up about 8% since our report came out. That’s actually a good thing, though, because while ETE has fulfilled most of its upside, there’s more room for KMI to grow.

And grow it will.

You see, Kinder Morgan is the undisputed king of pipeline companies.

Commanding 75,000 miles of pipeline, it’s the largest midstream energy company in North America – a position that gives the company unrivaled access to the continent’s newfound energy bounty.

Like ETE, KMI has engulfed many competitors.

Last year, the company made a huge move by acquiring El Paso Pipeline Partners, more than doubling the size of its pipeline network and gaining access to key natural gas development sites. Between that and its general partner interest in Kinder Morgan Energy Partners (KMP), KMI is flush with cash-generating assets.

The company posted a second-quarter net income of $277 million, compared to a net loss of $126 million a year ago. And revenue came in at $3.38 billion, up 56% from $2.17 billion last year.

Furthermore, KMI has raised its dividend in each of the past six quarters, most recently to $0.40 per share. KMI stock now yields about 4%.

And this is a company that had $1.41 billion in cash available to pay dividends at the end of 2012, up 62% from 2011 and far exceeding its published annual budget of $985 million.

That means more dividend hikes are bound to come – as are higher earnings, and thus, more profits for investors.

So keep tabs on both ETE and KMI. They’re both juggernauts. Their performances this year are far from an aberration. They’ll be repeated.

And “the chase” continues,

Jason Simpkins

Jason Simpkins

, Energy Editor

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