The U.S. oil benchmark, West Texas intermediate, plummeted 16% during the final week of February as fears gripped the market that the COVID-19 coronavirus outbreak would affect oil demand. It was oil's worst week in more than a decade and pushed the price down 13% for the month.
That sell-off weighed on most energy stocks last month, including less commodity-price sensitive midstream companies. Now several stand out as attractive buying opportunities this month. Topping the list are Kinder Morgan (NYSE:KMI), Enbridge (NYSE:ENB), and ONEOK (NYSE:OKE).
A big raise ahead despite turbulence in the oil market
Shares of Kinder Morgan have fallen about 10% from their peak earlier this year because of crashing crude prices. While Kinder Morgan does produce some oil, it has hedging contracts in place to lock in pricing for most of its crude oil output. Meanwhile, the bulk of the revenue it generates comes from fee-based contracts that pay it even if customers don't use their allotted capacity on its pipelines and storage terminals.
The company should be able to deliver on its 2020 outlook, which would see it produce about $5.1 billion in cash. That's enough money to cover its dividend -- which it plans to increase by 25% this year -- and all but about $150 million of its planned $2.4 billion expansion program. Meanwhile, it has more than enough flexibility on its balance sheet to cover that small shortfall and estimates that it could spend an additional $1.2 billion this year on expansion projects or share buybacks and stay within its leverage target.
With shares of Kinder Morgan falling this year, it now trades at less than 9 times cash flow and a forward dividend yield of 6.3%. That's an attractive blend of value and income.
Stable growth ahead
Enbridge's stock has fallen about 11% from its peak this year. It now trades at around 9.5 times its cash flow, a historically low level for a pipeline company.
While Enbridge is the largest oil pipeline company in North America, it has minimal direct exposure to crude prices. That's because it sells most of its capacity under "take-or-pay" contracts, meaning it collects fees even if shippers don't use the space.
Given the stability of its revenue, Enbridge expects to generate enough cash flow to pay its dividend, which it increased by 10% this year, as well as fund most of its expansion program while keeping its leverage toward the low-end of its target range. Meanwhile, it has the financial flexibility between its excess cash and borrowing capacity to fund enough new expansion projects to grow its cash flow per share by 5% to 7% per year, leaving it able to potentially increase its 6.5%-yielding dividend at a similar annual rate. Add that high yield to Enbridge's cheaper valuation after its stock sank this year, and it could potentially produce strong total returns in the coming years.
Hitting the accelerator
ONEOK has also tumbled about 10% this year even though the company doesn't have much exposure to oil price volatility since long-term, fee-based contracts generate the bulk of its revenue. Because of its focus on fees, ONEOK expects its cash flow to soar in the coming year as new expansion projects come online.
In ONEOK's estimation, its earnings will rocket 25% this year as it benefits from expansion projects that it completed toward the end of last year as well as those that will come online in 2020. Meanwhile, it expects another 20% earnings increase in 2021 as it benefits from this year's projects as well as those it will finish next year. That fast-paced growth will give the pipeline company the fuel to continue increasing its dividend, which currently yields 5.5%.
Lower prices and higher yields
The market sold-off last month because of fears that the spread of the COVID-19 coronavirus would affect the global economy as well as demand for oil. While the decline in the price of oil will have some impact on the energy industry this year, it probably won't have much effect on Kinder Morgan, Enbridge, or ONEOK, since they generate most of their income from fee-based contracts. Their declining valuations and rising yields make them among the sector's most attractive stocks to buy this month.