What happened
Oil and gas stocks have been unstoppable in recent months, and that includes shares of midstream companies that are less perceptible to the fluctuations in oil and gas prices.
Until June 8, shares of Kinder Morgan (KMI +0.72%), Enterprise Products Partners (EPD 1.77%), and Enbridge (ENB +0.23%) had risen more than 20% each this year. That date is important, as these stocks reversed course the next day and have continued their downward spiral this week. Here's how much these midstream oil and gas stocks had fallen through noon ET Friday, according to data provided by S&P Global Market Intelligence.
- Kinder Morgan: Down 16%.
- Enterprise Products Partners: Down 15.8%.
- Enbridge: Down 11.2%.
So what
Oil prices plunged to five-week lows on Tuesday ahead of the Federal Reserve's meeting where it was expected to announce a large interest rate hike to tame inflation that hit 40-year highs in May. Surging COVID-19 cases in China, especially in Beijing, this week added to the market's fears that demand for oil from China may not recover anytime soon.
Oil prices dropped further on Wednesday after the Fed announced an interest rate hike of 0.75 percentage points, also its biggest increase since 1994. Economists now believe a recession in the U.S. is imminent.
In between, a supply shock shook the natural gas markets, with U.S. natural gas prices plunging by double digits Tuesday to lows not seen in more than two months. The reason: An explosion rendering Freeport LNG's liquified natural gas (LNG) terminal in Texas inoperative until later this year.
Since the Texas LNG export terminal is one of the largest in the U.S. and requires almost 2 billion cubic feet of gas per day, the prolonged outage is expected to free up that gas for use elsewhere and help ease pressure on the tight natural gas markets. Natural gas stocks crashed after the update.
Kinder Morgan, Enterprise Products Partners, and Enbridge are the largest energy infrastructure companies in the U.S., owning and operating nearly 0.2 million miles of pipelines between them that transport crude oil, natural gas, natural gas liquids, refined products, and more. Enbridge alone moves nearly 30% of the oil produced in North America and almost 20% of the natural gas consumed in the U.S.
NYSE: ENB
Key Data Points
Most of these pipeline operators earn fees under long-term, regulated contracts -- with some even including inflation escalators -- and have therefore been able to generate stable cash flows even during economic downturns. That also means they don't benefit as much as exploration and production (E&P) companies when oil and gas prices rise. That explains why shares of Kinder Morgan, Enterprise Products Partners, and Enbridge didn't rally as much this year as upstream oil stocks.
Why then did these stocks fall this week if not for oil and gas prices? It's the fears of a looming recession that's gripped the markets and triggered a sell-off in stocks across almost every sector.
Now what
Oil and gas prices are slumping again today and were down sharply Friday morning on recession fears. Should investors in midstream oil stocks also worry and sell their shares? I'd answer that with a resounding no.
Midstream oil stocks, in fact, are the safest oil stocks you could own given the contractual nature of their businesses that insulate them from price fluctuations. So if this year's rally in Enterprise Products Partners, Kinder Morgan, and Enbridge shares pales in comparison to E&P oil stocks, these three stocks should also not fall much if oil prices were to drop.
NYSE: EPD
Key Data Points
These companies have little to fear when fuel prices fluctuate, which is why they can focus on growth at all times.
Enterprise Products Partners, for example, is reportedly planning to build a $5 billion steam cracker in southeast Texas with a capacity to process 2 million metric tons of ethane and propane per year, as reported by S&P Global Platts this week. The polyethylene and polypropylene produced in such steam crackers is the most common form of plastic used today across industries.
In fact, you'll be rewarded for being patient with these midstream oil stocks as all three are solid, bankable dividend growth stocks that can earn you passive income even during a recession.
NYSE: KMI
Key Data Points
Enbridge stock has increased its dividends every year for 27 years now and currently yields 6.4%. Enterprise Products Partners stock has increased its dividends for 23 consecutive years and yields 7.2% right now.
Kinder Morgan cut its dividend in 2016 amid the energy market turmoil, but it has bounced back strongly since, reducing its debt by more than $10 billion and generating free cash flow worth $15 billion in six years. Kinder Morgan has also increased dividend in the past five years, and the stock currently yields a solid 6.7%.
