Gas prices are higher this July, thanks to a rise in oil prices. But while summer vacationers may not be happy about it, the energy industry -- and its investors -- are ecstatic. Even companies that aren't directly involved in the sale of gasoline are seeing their fortunes rise.
We asked three Motley Fool investors for their top energy stock picks for July. And they came back with Hi-Crush Partners LP (NYSE:HCLP), Kinder Morgan (NYSE:KMI), and MPLX (NYSE:MPLX) as great options to consider. Here's why they think these energy industry players are ripe to outperform.
Better discipline after a severe rebuke from the market
Tyler Crowe (Hi-Crush Partners LP): Investing in commodities is by no means for everyone. The volatile and cyclical nature of these kinds of businesses can make for the occasional case of investment anxiety. Every once in a while, though, there is incredible value to be had in the right commodity at the right time. That's why shares of frack sand supplier Hi-Crush Partners LP look compelling today.
Sand has always been an essential ingredient in the hydraulic fracturing process, as it keeps the fractured rock open to let oil flow through. As oil and gas drilling companies have honed the fracking process, they have drastically increased the amount of sand used per well. So much so that the average well drilled today used two to three times more sand than a few years ago. That means, despite there being fewer rigs drilling for oil and gas, demand for frack sand is higher today than it was before the oil price crash in 2014. That bodes incredibly well for Hi-Crush since it is one of the lowest-cost producers in the business, and it has a robust logistics and last-mile delivery service that has translated into high-margin sales.
Yes, the company suffered mightily when oil prices crashed and sand demand dried up. It had an overly ambitious expansion plan in place that led to too much debt on the balance sheet. It has repaired most of that damage, however, and has since been able to expand its operations while paying down debt, reinstating its distribution, and buying back shares.
While there is always a possibility of another industry downturn, the company is in a much better position to handle tough times. Also, there is some evidence to suggest that we could be headed for a prolonged period of higher oil prices. If so, then sand will remain a hot commodity and Hi-Crush Partners will likely benefit.
Buy for the dividend, stay for the growth
John Bromels (Kinder Morgan): For pipeline operator Kinder Morgan, the bounce is underway. After a lackluster 2017, and a pretty dismal start to 2018, the company's share price seems to finally be coming up off its March lows, when it briefly dipped below $15.
What changed? Simple answer: the company's dividend. Management bumped the company's quarterly dividend by 60%, and that finally seems to have made the market sit up and take notice. Currently, it's yielding about 3.3%, and Kinder Morgan has indicated that more dividend hikes are in the cards.
As a natural gas pipeline operator, Kinder Morgan makes most of its money through a tollbooth model, by charging companies to move their product through its pipelines. That ensures a reliable income stream, but it also means that significant growth needs to be achieved through big expansion projects, which usually require debt to finance. For a while, Kinder Morgan's debt seemed to be out of control, but the company has made some strides in recent years to shore up its balance sheet. That should free up resources that Kinder Morgan can use to fuel growth.
With oil and gas prices high, and more petroleum products being drilled -- and shipped -- across the country, Kinder Morgan should be able to fund its growth plans and have enough left over to reward shareholders through dividend increases. That's a winning combination, but the market seems to be catching on, making July a great time to invest in this compelling growth story.
A great company for a better price
Matt DiLallo (MPLX): Pipeline and processing company MPLX went on sale last month after losing about 5% of its value, which pushed it down about 4% for the year. There's no logical explanation for the decline since oil prices have been on fire, which sent most energy stocks higher. Instead, the sell-off made an already excellent investment opportunity seem even better because it drove MPLX's high-yielding distribution up to 7.2%.
That's an excellent yield considering the strength of MPLX's financial metrics. For starters, the company currently generates enough cash flow to cover that payout by a very comfortable 1.29 times, which is well above the average of its master limited partnership (MLP) peers. Further, the company also has solid credit metrics, which are right on par with the top-tier MLPs. Those factors suggest that MPLX can easily maintain its high-yielding payout.
In fact, the company appears very likely to increase its distribution to investors at a healthy rate for years to come. MPLX already plans to boost its payout 10% this year, driven by $2.2 billion of fully funded growth projects currently underway. Meanwhile, the company has ample runway to continue expanding its existing footprint and may soon have additional acquisition opportunities come its way.
Put it all together, and we have a top-tier high-yielding stock with ample growth ahead, all for a lower price. Which makes MPLX an ideal energy stock to buy in July.
John Bromels owns shares of Kinder Morgan. Matthew DiLallo owns shares of Kinder Morgan. Tyler Crowe owns shares of MPLX LP. The Motley Fool owns shares of and recommends Kinder Morgan. The Motley Fool has a disclosure policy.