How do gas pipelines make money

Dividend yield and enterprise value as of Nov. Data source: Google Finance and YCharts. As the table shows, most of the companies on this list pay outsize dividends, which is why income-seeking investors tend to flock to the midstream sector. However, it's important for investors to drill down a lot further than just a midstream company's yield before buying.

Here's an in-depth look at three names from that list to give investors some insight into how to analyze the sector. Enbridge operates the world's longest and most sophisticated oil and liquids transportation network with more than 17, miles of pipelines.

Its main system moves an average of 2. In addition, Enbridge is a leader in transporting, gathering, processing, and storing natural gas. The company's ability to generate such steady cash flow gives it the funds to pay a lucrative dividend as well as invest in growth projects.

That ability to increase its high-yielding payout at a high rate positions Enbridge to deliver market-beating returns in the coming years.

Energy Transfer is undergoing an important transformation. The company recently completed the acquisition of its MLP Energy Transfer Partners in a deal that will give it full control of the assets and cash flow generated by that entity.

Following the Energy Transfer Partners merger, the new Energy Transfer is a fully integrated midstream company with assets spanning the entire value chain. The company's natural gas gathering and processing business consists of 33, miles of pipeline, as well as significant processing capacity, including both commodity-based and fee-based assets. From there, gas will travel across one of the largest intrastate and interstate pipeline networks in the U.

Meanwhile, Energy Transfer also has a world-class NGL platform that processes, transports, fractionates, stores, and exports NGLs, as well as a large-scale crude oil business, including long-haul pipelines, storage facilities, and an export terminal.

Finally, the company's investment in Sunoco LP gives it a stake in one of the largest fuel distribution businesses in the U.

That will give the company a significant portion of the funding needed to support its large-scale expansion program. The company has a long list of midstream assets under construction, including an important oil pipeline out of the fast-growing Permian Basin , an expansion of a major NGL pipeline, and a terminal to export ethane. These expansion projects should provide the company with the fuel to increase its lucrative payout in the coming years. Sabine Pass started operations in , enabling Cheniere to become the first company ever to export LNG from the lower 48 states.

The company currently operates four liquefaction units, or trains, which perform a refrigeration process that drops the temperature of natural gas down to minus degrees Fahrenheit, at which point it becomes a liquid, and its volume shrinks times. Cheniere is then able to load the LNG into gas carriers so it can be moved by sea to LNG import facilities in foreign countries.

From there, the LNG undergoes a regasification process so that it can flow through pipeline systems to its final destination. Cheniere Energy currently has one more LNG train at Sabine Pass under construction that should be operational in , and a sixth one under development.

It also has two at Corpus Christi under construction that should also start operations next year, and it recently started construction of a third train at that site.

Cheniere also owns enough land at both locations to continue building new trains that could double its capacity to produce LNG in the future. Cheniere Energy makes most of its money by locking in a fee-based margin under long-term contracts. The company purchases natural gas on the market; pipelines transport the product to its facilities, including ones it owns as well as those operated by third parties such Kinder Morgan and Williams Companies , which built them specifically for that purpose.

The cash flow from those fees gives Cheniere some of the money needed to continue expanding its LNG empire. The company eventually expects to pay a dividend to its investors with some of the cash flow from its LNG business. As big as the North American midstream oil and gas sector is today, it will become even larger in the coming years.

This forecast suggests that midstream companies will be busy expanding their footprints over the next two decades. That growth has the potential to enable midstream companies to create significant value for investors as they increase their high-yielding dividends.

Two factors should make the midstream sector attractive to investors. First, midstream companies tend to generate lots of cash flow because fee-based contracts or regulated tariffs supply them with the bulk of their income. That makes them less volatile than other energy stocks and gives them the cash needed to pay some of the highest-yielding dividends in the market.

The sector also offers ample growth in light of the projected need for new midstream assets in North America. As midstream companies build these assets, they should boost their cash flows, giving them more money to pay dividends. That growing income stream could provide many midstream stocks with the fuel they need to outperform the market in the coming years. The halt in production resulted in a major win for the Standing Rock Sioux Tribe, which has been fighting a legal battle against the pipeline operating and transporting oil for nearly three years.

An August 5 decision by another court allowed the pipeline to continue operating , pending further legal review. Dominion Energy and Duke Energy announced the cancellation of the Atlantic Coast Pipeline due to "legal uncertainties" surrounding the project. According to Steve Fleishman, managing director and utilities analyst at Wolfe Research, Buffett's acquisition will provide a steady stream of revenue and a quality asset, regardless of the lack of midstream development.

Buffett also has always preferred investments in a market where more control is reasonable to expect — lack of new pipeline supply could be a plus as far as his preference for less competition likely to come into the market.

It's not just the political optics, though that plays into the shift highlighted by Dominion away from midstream. The market has been downgrading the value of gas pipeline assets owned by utilities.

Even with one of the biggest utility operations in the U. Assets like the ones Dominion sold to Berkshire are harder for utilities to justify given the push among constituents to decarbonize. Referring to sensitive bases of ratepayers in regions around the country where utilities are regulated and resistance to fossil fuels are growing.

The utilities' market dynamic partially explains why Buffett was able to make the deal without paying a hefty premium. Dominion is moving in another direction, with significant offshore wind opportunities in some of its markets, like Virginia. Utilities owning midstream gas assets outside their core business will be slowing down as a business focus, with the premiums formerly commanded no longer available. Utility stocks did well in recent years, but "the stocks have not done well on mistream deals," Karp said.

But natural gas as a fuel is not going away in our lifetime. The long-term use case is there. With declining access to domestic oil supply as midstream development cease, some analysts worry about the potential for energy security risks and the U. Hammond at Simmons Energy said the recent regulatory hurdles in the oil and natural gas markets could ultimately mean, "you'd be relying on increasing very insecure sources of supply, which is something we've tried to move away from in terms of energy security, turning the clock back to the 70's, 80's.

But in the mid-term, what is maybe more likely is a bifurcation in the U. But any large-scale employment during construction is short-lived, and these jobs may or may not go to local residents who need them. Projected long-term employment numbers for operating the pipelines and compressor stations are significantly lower than during the construction phase. Compare this with jobs in the solar sector: employment in Virginia is strong, North Carolina is booming and West Virginia has a lot of room for growth.

The companies building the Atlantic Coast and Mountain Valley Pipelines stand to profit from these infrastructure projects. When granting permits, the Federal Energy Regulatory Commission guarantees the companies building the pipelines a profit by authorizing them to adjust their rates on transporting gas.

At the same time, the partnerships financing the pipelines — such as Dominion Midstream Partners, which has indirect ownership of the Atlantic Coast Pipeline, and EQT Midstream Partners, a lead partner in the Mountain Valley Pipeline project, are not required to pay federal taxes. According to the New York Times , Duke has paid no total income tax between and Guaranteed profits and low tax rates are just two of the benefits the tax codes grant companies in the energy sector.

Under the previous administration, the United States worked with other nations to set a path toward limiting the severity of climate change, first in Copenhagen and later in Paris. The United States proposed to reduce its greenhouse gas emissions significantly over the coming two decades. Toward that end, the Obama administration issued standards that would have cut methane emissions nearly in half. Over a year timeframe, methane is nearly 86 times more powerful as a warming agent in the atmosphere than carbon dioxide.

One of the major sources of methane emissions is the production of natural gas. A recent study by Oil Change International indicates that if current projections hold true, the United States would exceed its entire greenhouse gas targets just through its dependence on natural gas, and particularly from the boom in production from the Marcellus and Utica shale formations.

Energy needs can be met with existing pipelines coming out of the Appalachian Basin. But as companies rush to extract more natural gas, the overall capacity could soon be reached.