Volatile energy stocks, representing ownership in companies dependent on the vagaries of oil and gas prices, have disenchanted many investors in the last few years. However, the sector's high yields continue to attract income investors. Several energy stocks are currently offering yields much higher than their historical yields. Midstream companies, in particular, offer attractive dividends and tend to be relatively less prone to commodity price fluctuations compared to oil and gas producers.
Though midstream companies' earnings and their stocks do get impacted by commodity prices, the industry's business model is sound. There will always be a demand to transport oil and gas from the source of production to refineries, processing facilities, and end markets, irrespective of commodity prices. Five midstream stocks currently offering attractive yields are Kinder Morgan (KMI 0.05%), ONEOK (OKE 0.63%), Williams Companies (WMB 0.50%), Enbridge (ENB 1.91%), and Enterprise Products Partners (EPD -0.45%).
Kinder Morgan: Moving 40% of U.S. natural gas
Kinder Morgan operates the country's largest gas transmission network and moves roughly 40% of total U.S. natural gas consumption and exports. The midstream giant lost investors' trust big time when it slashed its dividends in 2015. However, the company has taken steady steps to improve its balance sheet position since then.
KMI Total Long Term Debt (Annual) data by YCharts.
While Kinder Morgan's 5% dividend hike in the latest quarter looks weak compared to a previously guided 25%, it is the right decision based on current market conditions. Despite the lower-than-expected dividend rise, the stock's current yield of around 6.5% is extremely attractive. Kinder Morgan expects a 10% reduction in its distributable cash flow for 2020 due to the coronavirus pandemic, and if the DCF falls only that much, Kinder Morgan can easily maintain its dividend. The company expects to keep leverage for the year within its target range -- a good sign for income investors.
ONEOK: Increasing dividends for more than 15 years
ONEOK has had a stable or rising dividend for more than 25 years. Further, the company has raised its dividends for 15 years in a row, including during the 2014 commodity price rout. The stock currently offers an extremely attractive yield of more than 10%. In the chart below, you can see dividend yields for all the stocks I am discussing in this article. ONEOK has the largest.
KMI Dividend Yield data by YCharts.
Learning from the 2014 rout, ONEOK slowly converted its percent-of-proceeds contracts to ones that were either fee-based or included a fee component. Still, the POP component of contracts in the company's gathering and processing segment exposes it to price and volume risks.
At the end of May, ONEOK said it expected 9% growth in its adjusted EBITDA in 2020, far lower than the 25% growth it guided for in February. Additionally, its net debt-to-EBITDA ratio of 4.86 is a bit on the high side. High leverage forced ONEOK to tap capital markets at a highly unfavorable stock price to meet its funding needs.
On the positive side, the company has already made a significant chunk of its planned capital expenditure for 2020. That makes a major portion of its earnings available to pay dividends. As the effects of coronavirus subside and economic activity picks up, the demand for energy commodities will surely improve. That should support ONEOK's earnings, and in turn, dividends.
Williams Companies: A top natural gas operator
Williams Companies has reported impressive growth after its 2014 dividend cut. The company recently reported strong results for the first quarter, with a 4% year-over-year increase in adjusted EBITDA. Additionally, it expects its earnings for 2020 to be within its guidance range of $4.95 billion to $5.25 billion, though toward the lower end of the range. Roughly 42% of Williams Companies' EBITDA is backed by reserved capacity contracts, which require customers to pay even if transport volumes are less than the capacity reserved.
Williams Companies' debt-to-EBITDA ratio, however, is on the higher side, as compared to its top peers. Take a look at the chart below to see financial debt to EBITDA ratios for the companies in this article.
KMI Financial Debt to EBITDA (TTM) data by YCharts.
A higher leverage indicates a greater risk of a dividend cut if energy market conditions remain challenged. However, if the company's earnings come out in-line with its expectations -- which is highly likely given improving products demand -- maintaining the payout shouldn't be a major issue.
Enbridge: Canadian midstream giant
Enbridge has a track record of increasing dividends consecutively for 25 years. The company's low-risk gas transmission, distribution, and storage operations helped it accomplish this feat. Additionally, Enbridge's key "mainline" pipeline system, which accounts for roughly 30% of the company's EBITDA, is usually in high demand due to its competitive tolls and constrained takeaway capacity from the Canadian oil sands.
Indeed, COVID-19 has hit demand for oil and refined products, resulting in lower volumes on Enbridge's mainline system. However, as demand slowly improves, the company expects a majority of the lost volumes to be back by the end of this year. In the beginning of June, Enbridge reaffirmed its 2020 distributable cash flow guidance, which it had previously kept unchanged. The company's affirmation reflects improving demand for energy products after a steep drop in March and April. So, things seem to be moving as Enbridge expects, which sets up the company well to continue its dividend streak.
Image source: Getty Images.
Enterprise Products Partners: A top midstream MLP
After 63 consecutive quarters of increase, Enterprise Products Partners kept its dividend flat in the first quarter. While the MLP had the room to raise the payout again, it adopted a conservative approach considering the impact of COVID-19 on demand for refined products and an uncertain demand outlook. Indeed, Enterprise's financial discipline over the years has paid well for the company. At around 3.6 times, it's debt-to-EBITDA ratio is one of the lowest among its top peers.
Surely, Enterprise Products Partners will not be immune to the demand destruction for oil and gas products. But its diversified asset base, fee-based earnings, and conservative leverage places it to weather the current market conditions better.
