Energy markets look ripe for a recovery. Though uncertainties such as rising coronavirus cases in the U.S. and Europe remain, oil and gas demand-supply dynamics could be improving. Curtailed production by U.S. producers and talks of extending cuts by OPEC and its partner countries should help sync oil and gas supply with their demand. At the same time, the U.S. Energy Information Administration expects oil demand in 2021 to rise from its levels in 2020. Let's look at two energy stocks trading under $20 that offer attractive dividend income and could be on stronger footing now that energy markets are finding balance.
Kinder Morgan
With a dividend cut in 2014, Kinder Morgan (KMI -0.88%) fails to attract investors looking for existing or soon-to-be Dividend Aristocrats. Indeed, that could be the reason this stock is available at a sale. But there are enough reasons to consider buying this top midstream operator right now.
First and foremost, Kinder Morgan has been consistently working to reduce its debt ever since it was forced to slash its dividends due to its high leverage in a deteriorating market. And it has progressed significantly on that front.
KMI Financial Debt to EBITDA (TTM) data by YCharts
Second, Kinder Morgan largely generates fee-based cash flows from its pipeline and storage assets. That's the key reason the company expects just a 10% reduction in its distributable cash flow for 2020, despite the challenging market conditions. Only 2% of the company's cash flows are exposed to changes in commodity prices.
Third, Kinder Morgan has enough cash to cover its dividends easily. In the third quarter, the company's distributable cash flow was 1.8 times the amount it paid in dividends. Kinder Morgan raised its dividend by 5% in the first quarter. Though that was lower than the 25% hike it promised, it looks like the right step considering the market situation at the time. Kinder Morgan intends to use its excess cash either to raise dividends, buy back shares, or do both. In all cases, it intends to keep its balance sheet strong.
And finally, U.S. natural gas production and exports are expected to grow over the coming years. With strong asset footprints both in the domestic and exports markets, Kinder Morgan is well placed to benefit from this growth.
Overall, Kinder Morgan looks to be in far better shape than it was in 2014. Importantly, it's well placed to keep growing its already attractive dividend.
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Crestwood Equity Partners
Midstream master limited partnership Crestwood Equity Partners (CEQP) sports a massive yield of more than 14%. In March, the stock fell as much as 90% below its price at the start of the year. It is still down 44% year to date. Interestingly, Crestwood's performance so far doesn't justify the fall in its stock price.
Crestwood Equity Partners recently reaffirmed its revised EBITDA guidance for 2020. In response to market conditions, the company lowered its EBITDA guidance for the year by 10% in May. Notably, even after the downward revision, the guidance expects 4% growth in EBITDA in 2020. Not bad in a year when many of its peers' earnings are flat or slightly lower than 2019.
Crestwood Equity Partners' leverage isn't much of a problem either. It ended the third quarter with a debt-to-adjusted-EBITDA ratio of 4.1 times. It has no near-term debt maturities until 2023. The company's Q3 distributable cash flow of $86.5 million provided 1.9 times coverage to its distributions for the quarter.
Crestwood's diversified midstream operations contributed to its resilient performance in 2020. Around 87% of the company's EBITDA is from take-or-pay or fixed-fee contracts. Take-or-pay contracts require customers to either use the contracted capacity or pay a penalty if they don't use it.
While Crestwood Equity is doing well so far, it's exposed to risk if any of its producer customers face bankruptcy. The market has probably overreacted with respect to this risk. As an example, Crestwood has regularly been receiving payment for its services to Chesapeake Energy, even though Chesapeake has filed for bankruptcy.
Another risk stems from Crestwood's master limited partnership structure, which has fallen deeply out of favor, limiting the stock's upside potential. However, investors open to investing in MLPs will find Crestwood's current yield alluring due to its strong operational performance, strong balance sheet, and strong coverage.
