The energy sector has been a great place to invest over the past two years due to the strong tailwinds to energy prices stemming from the war in Ukraine as well as rapid inflation in the broader economy (which has historically been a tailwind for energy prices).
On top of that, valuations in the energy sector entered their recent bull market at very attractive levels given that the sector got hammered during the Covid-19 lockdowns and then also were dealt a blow when the Democrats won the 2020 election.
Many expected (correctly) that the Biden administration would provide subsidies for the renewable energy sector, further accelerating the energy transition away from fossil fuels. However, inflation and Russia’s invasion of Ukraine have tipped the scales back strongly in favor of fossil fuels, at least for now, and energy stocks have benefited as a result.
Below we will discuss three high-yield midstream energy stocks that we think are worth owning right now to benefit from the ongoing tailwinds for the energy sector.
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TC Energy (TRP) owns excellent midstream assets, especially in the natural gas and crude oil spaces. Its natural gas pipeline business spans three countries (the U.S., Canada, and Mexico), giving it exceptionally long reach that makes it a competitively advantaged asset.
It also owns the Keystone crude pipeline, which has the distinguishment of being the second-largest crude pipe in the industry and also delivers crude to the U.S. Gulf Coast and Midwest markets. Furthermore, its NGTL and Mainline natural gas pipelines transport 75% of Western Canada’s natural gas takeaway capacity.
With such significant and important assets, TRP has no lack of opportunities to deploy capital into accretive growth projects. As a result, it should be of little surprise that it is investing billions in current growth projects and has a multibillion-dollar growth project backlog as well.
At the same time, however, it is also needing to prioritize deleveraging of its balance sheet in order to preserve its BBB+ credit rating. As a result, the company’s growth in the near term will likely fall short of its full potential as it will have to deploy capital to pay down debt instead of investing fully in growth opportunities. We forecast a modest 4% distributable cash flow per share CAGR over the next half decade.
While its leverage could be lower, we do not think that the dividend will be cut anytime soon as its payout ratio is a mere 54%, the balance sheet remains in little trouble of distress, and the cash flow profile is very stable. In fact, TRP has grown its dividend for seven years in a row, so it is unlikely that TRP would even consider cutting its dividend — and will likely continue growing it for the foreseeable future.
With a forward dividend yield of 6.4%, TRP looks like a very attractive high-yield energy stock.
A Kinder, More Attractive Energy Stock
Kinder Morgan (KMI) is a leading midstream energy company that owns North America’s largest CO2 transportation, independent refined products transportation, independent terminal, and natural gas transmission businesses. As a result of its immense scale, it transports approximately 40% of the United States’ natural gas.
Given that 94% of its EBITDA is resistant to short-term commodity price movements, KMI enjoys a very stable cash flow profile. Its resistance to swings in the energy industry is further enhanced by the fact that the vast majority of its counterparties are investment grade.
Similar to TRP, KMI’s immense scale gives it numerous opportunities to invest in growth projects. That said, the company is also investing significant sums of cash into share repurchases because it believes that its stock is undervalued right now. Considering that it is facing some headwinds from recontracting legacy assets at reduced rates and there are increased regulatory hurdles for growth investments in the pipeline industry, we forecast a modest 2.6% distributable cash flow per share CAGR over the next five years.
Given its rock-solid investment grade credit rating, significant liquidity, and leverage ratio that is now below its long-term target, KMI’s dividend looks very safe. When you combine these factors with the fact that it has grown its dividend for five consecutive years and it has a mere 52.1% payout ratio, the dividend is not only very safe but also likely to continue growing in the coming years.
KMI’s forward dividend yield of 6.1% makes it a very attractive high-yield energy stock.
Positioned for Longevity
The Williams Companies’ (WMB) natural gas midstream infrastructure positions it well for longevity even in the face of the energy transition. Furthermore, its network services 14 key supply regions, and has a transmission pipeline business that services densely populated regions.
WMB also has grown its adjusted earnings per share and dividend per share every year since 2018 despite facing numerous macroeconomic and industry-specific challenges, reflects the strength and resilience of its business model.
Its strategically located assets give it a plethora of attractive growth investment opportunities. These include 35 natural gas transmission, six Deepwater GOM, four Northeast G&P, and five Haynesville & Wamsutter G&P expansion projects. WMB is also investing in opportunistic share repurchases to further supplement per share growth. As a result, we conservatively estimate a 4% distributable cash flow per share CAGR over the next half decade.
Similar to TRP and KMI, WMB’s dividend is also quite safe. It has a remarkably resilient business model, a strong investment-grade balance sheet, consistent and steady per-share distributable cash flow growth, and a very low 43% payout ratio. As a result, we expect WMB to not only sustain its dividend moving forward, but to grow it on an annualized basis as well.
With a forward dividend yield of 5.4%, WMB is an attractive high-yield energy stock with very low risk of facing a dividend cut.
Final Thoughts
Despite the strong outperformance in energy stocks recently, there are several high-quality and low-risk opportunities in the sector that still offer compellingly high dividend yields.
By purchasing shares of TRP, KMI, and/or WMB, you can own a slice of some of North America’s most important and competitively positioned natural gas infrastructure and reap consistent and attractive dividends for many years to come.
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Source: https://realmoney.thestreet.com/investing/energy/3-high-yield-energy-stocks-worth-owning-16114883?puc=yahoo&cm_ven=YAHOO&yptr=yahoo