2 Pipeline Stocks to Buy in February

U.S. oil and natural gas production has reached record levels—13.6 million barrels per day of oil in 2025 and over 37.7 trillion cubic feet of dry gas in 2024—helping the U.S. remain the world’s top LNG exporter since 2023 as Europe and Asia substitute Russian supply. Midstream operators Enterprise Products Partners and Kinder Morgan are highlighted for their scale and stable, fee-based cash flows: Enterprise operates >50,000 miles of pipeline, is adding 900 million cubic feet/day of Permian gas-processing capacity by mid–late 2026, and has raised its payout 27 consecutive years (6.6% yield), while Kinder Morgan runs ~66,000 miles of pipeline, moves about 40% of U.S. gas and has a ~$10 billion backlog with roughly half tied to power demand from AI data centers. The piece emphasizes predictable income and dividend appeal of pipeline stocks amid sustained LNG and domestic gas demand.

Analysis

Market structure: Rising U.S. oil (13.6 mb/d) and dry gas (37.7 Tcf in 2024) and escalating LNG exports shift value to midstream fee-takers (EPD, KMI) that own take-or-pay contracts and export terminals. Expect incremental pricing power in basins with constrained takeaway capacity (Permian, Haynesville) for 12–36 months as new processing capacity (EPD +900 MMcf/d by mid‑late 2026) phases in, compressing regional basis once online.

Risk assessment: Tail risks include a rapid global demand shock (Asia/Europe LNG drop >20%), US regulatory changes to MLP tax status, or a major pipeline outage (weeks) causing counterparty defaults; these would materially compress distributable cash flow and raise financing costs. Near-term (0–3 months) volatility driven by LNG shipping/spot prices; medium-term (6–24 months) execution risk on capex and backlog conversion (KMI ~$10bn tied to power/AI demand).

Trade implications: Favor long core midstream exposure with income capture and asymmetry management: EPD as a 2–3% portfolio position for stable 6–7% yield; KMI as 2–4% for growth via backlog exposure. Use covered calls to harvest yield (roll monthly/quarterly) and pair long midstream vs short E&P (producers or XOP) to neutralize commodity price beta; size shorts at 50–75% notional of midstream longs.

Contrarian angles: Consensus underprices counterparty concentration and downstream bottlenecks—short-term dislocations could strengthen pricing for strategically located pipelines, not weaken demand. Also, AI-driven power projects (KMI backlog) are stickier than cyclical LNG spot; mispricing exists when investors treat all energy names as commodity-exposed rather than fee-based infrastructure.

Key Decisions for Investors

• Establish a 2.5% portfolio long position in EPD (MLP) targeting 12–24 month total return of 12–18% while collecting ~6.5% yield; reduce to 1% if distribution coverage ratio falls below 1.1x or net debt/EBITDA rises >4.0x.
• Allocate 3% long to KMI for 12–36 months to capture project backlog exposure (AI/data-center driven power demand); take profits if KMI’s dividend yield compresses below 3.5% or backlog conversion announcements stall for >90 days.
• Implement a pair trade: long $KMI + $EPD (combined 4–6% weight) and short XOP (or equivalent E&P basket) sized 50–75% of notional to hedge commodity price swings; rebalance monthly and tighten short if Henry Hub drops >25% from current levels.
• Use options to enhance yield and limit downside: sell 1–3 month covered calls on EPD/KMI at ~5–7% OTM to boost income; buy 6–12 month protective puts (cost <2% premium target) if implied volatility is <30% to cap tail risk while holding core positions.