However, despite that big run, many energy stocks still trade at cheap valuations. Three that stand out as compelling options for value investors these days are Crestwood Equity Partners (CEQP), Enbridge (ENB 1.05%), and Kinder Morgan (KMI 0.17%).
Recent moves make it even cheaper
Master limited partnership (MLP) Crestwood Equity Partners weathered last year's volatile oil market quite well. The midstream company generated $580.3 million of adjusted EBITDA (earnings before interest, taxes, depreciation, and amortization) in 2020, along with $361.2 million of distributable cash flow -- up 10% and 18.5%, respectively, from 2019's levels. That enabled the company to produce enough cash to cover its monster 8.9%-yielding distribution two times.
Crestwood Equity expects its earnings and cash flow to continue growing in 2020, thanks to improving oil-market conditions. It recently boosted its outlook to a range of $575 million to $625 million for adjusted EBITDA, and $335 million to $385 million for distributable cash flow. With Crestwood's enterprise value (EV) currently $4.2 billion and its market cap $1.8 billion, this forecast implies it trades at 8.4 times its earnings and 4.7 times its cash flow at the midpoint of its guidance ranges. It's even cheaper on a per-unit basis, since the company agreed to repurchase 15% of its outstanding units from a former strategic investor. Its cheap valuation is leading the MLP to authorize an additional repurchase of up to $175 million of its equity.
Canadian energy infrastructure giant Enbridge also weathered last year's storm reasonably well. The company generated marginally higher adjusted EBITDA in 2020, and 2% more distributable cash flow, despite all the turbulence in the oil market.
Enbridge expects to continue growing in 2021. The company sees its distributable cash flow rising to a range of $3.73 to $3.96 per share at the current exchange rate. With Enbridge stock recently trading at around $37 a share, it sells for less than 10 times its cash flow.
Meanwhile, it's even cheaper when considering its embedded growth prospects. Enbridge projects that its cash flow per share will expand at a 5% to 7% annual rate through at least 2023, fueled by a multibillion-dollar expansion program that includes new oil and gas pipelines and offshore wind farms in Europe. Add in Enbridge's dividend, currently yielding 7.2%, and it has double-digit total return potential.
Cheap no matter how you slice it
Natural gas pipeline giant Kinder Morgan faces a few more headwinds than its peers, which has put some pressure on its cash flow. The company's distributable cash flow dipped to $2.02 per share last year, and is on track to decline to $1.95 per share in 2021. Meanwhile, its adjusted EBITDA is on pace to slip another 2% this year to $6.8 billion.
However, with Kinder Morgan's stock currently trading at less than $17 a share, it sells for 8.7 times its cash flow, which is cheap for a company that generates gobs of reasonably stable cash flow. It currently produces enough cash to cover its 6.3%-yielding dividend and expansion program, with room to spare.
Furthermore, it's cheap relative compared to the underlying value of its assets. That's evident in the recent sale of a minority interest in Natural Gas Pipeline Company of America for 11.2 times its 2020 EBITDA. To put that into perspective, Kinder Morgan as a whole trades at 10.6 times its projected 2021 EBITDA. This valuation discount is leading Kinder Morgan to target $450 million in share repurchases this year.
Finding value in a red-hot sector
While energy stocks have surged this year, many still trade at low valuations because the sector still hasn't recovered from last year's turbulence. Energy infrastructure companies, in particular, sell for cheap prices following last year's massive sell-off in the sector -- all because of worries that a wave of bankruptcies among their customers would cut deeply into their cash flow. That didn't happen, leaving value investors with many enticing options. And those are led by Crestwood, Enbridge, and Kinder Morgan.