Investors have sold off energy stocks over the past month because of plunging oil prices following the COVID-19 outbreak. Driving down pricing is a massive disruption in demand for oil and refined products because governments around the world have issued stay-at-home orders to slow the spread.
The slump in oil prices and demand has investors growing worried about the sustainability of dividends in the oil patch. Several companies have already cut their payouts, and many more are likely to join them. That's weighing on the entire sector since investors aren't sure which companies will be able to maintain their payouts during this challenging period.
Two, however, that stand out for their seemingly sustainable high yields are Enbridge (ENB -0.62%) and Magellan Midstream Partners (MMP). Here's why they look like good buys for yield-seeking investors.
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The financial strength to withstand this storm
Units of crude oil and refined products MLP Magellan Midstream have tumbled more than 40% this year. That sell-off pushed the yield on its distribution up to an eye-popping 11%.
Weighing on Magellan's value is the impact the COVID-19 outbreak is having on fuel demand. The company noted at its virtual analyst day late last month that it expects fuel demand across its system to decline by 25% during the second quarter. This impact, along with a few others, will likely reduce its full-year cash flows by $95 million to $180 million, according to the company's analysis. However, it still expects to generate enough cash to cover its payout by 1.1 times at the low end of that range this year.
Meanwhile, the company only anticipates needing to borrow between $33 million and $118 million to cover the shortfall in cash inflows and outflows for the distribution, growth-related spending, and unit repurchases thanks to recent asset sales. Even with those additional borrowings, and the expected reduction in earnings, Magellan anticipates that its leverage ratio will be between 3.4 and 3.7 times debt-to-EBITDA this year, which is comfortably below its 4.0 target, giving it the flexibility to maintain its payout through this downturn.
Built to keep risk at bay
Shares of Canadian oil pipeline giant Enbridge have shed about 30% of their value this year. That slump pushed the yield on Enbridge's dividend up to about 8.5%.
Enbridge, however, has a very resilient business model. Overall, 98% of its cash flow comes from cost-of-service or take-or-pay contracts, many of which require that its customers pay for space even if they don't use their allotted capacity. Meanwhile, most of its customers are in excellent financial shape, with 95% having investment-grade or equivalent credit ratings.
Enbridge compliments that strong contract profile with a top-notch balance sheet. It entered this year with a leverage ratio at the low end of its 4.5-5.0 times EBITDA target range. Meanwhile, it only pays out about 60% of its annual earnings via its dividend, which provides it with lots of cushion. In Enbridge's view, it has enough financial flexibility this year to pay its dividend, finance 6.5 billion Canadian dollars ($4.6 billion) of maintenance and expansion projects, and address CA$4 billion ($2.9 billion) of maturing debt. Further, it anticipates accomplishing all that while retaining about CA$8.5 billion ($6.1 billion) liquidity, which includes borrowing capacity before hitting the top end of its leverage range. Because of that financial flexibility, Enbridge should have no problem maintaining its payout during these challenging times.
Strength amid the storm
Both Enbridge and Magellan Midstream have resilient business models and strong balance sheets. That provides them with the financial flexibility to maintain their high-yielding payouts during this period of uncertainty. They're top options for investors seeking a big-time income stream to buy these days.
