What Is Pipeline Stock? Your Complete Investment Playbook

Pipeline stocks might sound niche, but they’re actually a cornerstone of energy infrastructure investing. Here’s what every investor should know before diving in.

The Basics: What Makes Pipeline Stocks Different

Think of pipeline companies as the middlemen of the energy world. They don’t drill for oil or gas—they move it. In North America alone, there are over 2.4 million miles of energy pipelines, and the companies operating these networks make steady money by charging fees for transportation. This predictable cash flow is exactly why pipeline stocks appeal to income-focused investors.

The genius behind the business model? Long-term contracts. Energy producers sign agreements with pipeline operators guaranteeing fixed fees for moving their commodities from wellheads to refineries and end consumers. No drilling risk, no commodity price swings—just stable, recurring revenue.

Understanding the Energy Value Chain

To evaluate pipeline stocks properly, you need to grasp how energy flows through the system. The industry breaks down into three segments:

Upstream is where the drilling happens—companies extract crude oil and natural gas from the ground.

Midstream is where pipeline stocks operate. This segment includes gathering pipelines that collect raw materials from wells, processing plants that refine them, storage facilities, and long-haul transportation assets that ship products across regions.

Downstream refines crude into gasoline, diesel, jet fuel, and other consumer products.

Pipeline companies typically own assets across the midstream layer. For crude oil, that means gathering pipelines, transportation networks, and storage terminals. For natural gas, it’s more complex—the infrastructure includes gathering systems, processing plants that separate valuable natural gas liquids (NGLs), storage facilities (sometimes in depleted reservoirs or underground caverns), and distribution networks that deliver gas directly to homes and businesses. Some natural gas even gets liquefied (LNG) and shipped worldwide.

How Pipeline Companies Actually Make Money

Understanding revenue streams is crucial for evaluating pipeline stocks. Most companies earn income from three sources:

Fixed-fee contracts are the bread and butter. Producers pay pipeline operators a set fee per unit of commodity transported, regardless of price fluctuations. This creates the stable cash flow investors crave.

Regulated tariffs apply to interstate pipelines. The Federal Energy Regulatory Commission (FERC) sets rates, essentially guaranteeing fair returns. This regulatory protection is valuable because it prevents extreme competition and rate volatility.

Commodity margins come from processing operations. For example, if a company buys raw natural gas, separates out the more valuable NGLs, and sells both streams separately, it profits on the difference. These margins can be lucrative when commodity prices rise but squeeze when prices fall.

Here’s the investor takeaway: diversified revenue streams matter. Companies deriving 85%+ of cash flow from fees and regulated sources experience less volatility than those relying heavily on commodity margins.

The MLP Factor: A Structure Worth Understanding

Some pipeline companies structure as Master Limited Partnerships (MLPs) rather than traditional corporations. MLPs offer tax advantages—they typically avoid federal income taxes at the corporate level if they meet specific criteria, and unit holders receive favorable tax treatment on distributions.

But there’s a catch. MLP distributions create complex tax paperwork for individual investors, and they’re generally unsuitable for retirement accounts like IRAs. Weigh these tradeoffs carefully before investing in MLPs.

Key Metrics That Actually Matter

Pipeline investors focus on different metrics than typical stock analysts because traditional earnings don’t capture the full picture. Here’s why: pipeline companies record massive depreciation charges due to capital-intensive operations, which depresses reported net income even though cash generation remains strong.

Distributable Cash Flow (DCF) is the critical metric. It represents actual cash available to pay distributions to investors. Think of it as free cash flow specifically for income purposes.

Distribution Coverage Ratio tells you how comfortably a company covers its payouts. A 1.2 ratio means the company generates $1.20 in DCF for every $1.00 distributed—leaving 20% for reinvestment and safety. Ratios below 1.0 are warning signs; above 1.5 indicates conservative management.

Debt-to-EBITDA measures financial leverage. Most pipeline companies aim for ratios below 5.0 to maintain investment-grade credit ratings. This low leverage makes it easier and cheaper to borrow for expansion projects. Higher ratios signal financial stress, especially if commodity prices collapse.

Enterprise Value to EBITDA and Price-to-DCF are valuation tools. Since earnings don’t reflect pipeline company health, investors compare EV/EBITDA and price-to-DCF multiples across the sector to identify undervalued opportunities.

Comparing the Big Three

Let’s examine three major pipeline stocks to see how these metrics play out in practice:

Enbridge operates North America’s largest crude oil transportation system—over 17,000 miles of pipeline moving 28% of continental oil production. The company generates 96% of cash flow from regulated assets and long-term contracts, providing exceptional stability. In 2017, DCF of $4.2 billion covered distributions by a comfortable 1.5 times. The downside? Enbridge carried a 5.0 debt-to-EBITDA ratio from recent acquisitions, though management is addressing this through asset sales. The stock traded near peer group valuation multiples at the time of analysis.

Kinder Morgan operates the continent’s largest natural gas pipeline network—70,000+ miles transporting 40% of daily U.S. consumption. The company derives 90% of anticipated income from predictable fee-based sources, with only 10% exposed to commodity fluctuations. DCF of $4.6 billion provided an ultra-conservative 2.6x distribution coverage. Though leverage was elevated initially at 5.1x debt-to-EBITDA, a major asset sale dropped it to 4.5x. Notably, Kinder Morgan traded at a discount to peer multiples—12.2x EV/EBITDA and 11x DCF compared to its peer group, suggesting undervaluation.

Enterprise Products Partners, structured as an MLP, operates 50,000+ miles of integrated midstream infrastructure. NGLs contributed 57% of recent revenue, while fee-based contracts and regulated sources provided 90% of total income. The company generated $4.5 billion in DCF with a healthy 1.2x coverage ratio and an improving leverage metric of 3.7x debt-to-EBITDA (from 4.1x). However, Enterprise traded at a slight premium to peer multiples, reflecting its high quality but offering less margin of safety.

The Bottom Line for Pipeline Stock Investors

Pipeline stocks deliver what many investors seek: predictable cash flow, regulatory protection, and reasonable valuations. Among the major players, Kinder Morgan stood out with the highest coverage ratio, lowest leverage trajectory, and most attractive valuation—suggesting the strongest risk-reward profile for new investors.

However, the pipeline sector includes many quality operators beyond these three. Your next step should be screening the entire universe of publicly traded pipeline companies to identify which combination best fits your portfolio’s income and growth objectives while trading at compelling valuations.