This year, energy stocks have been one of the few bright spots in the stock market. The energy sector has delivered a roughly 30% gain, fueled by higher oil and natural gas prices. That's due to improving demand coming out of the pandemic and tightening supplies as a result of years of underinvestment, made worse by Russia's invasion of Ukraine. Those market dynamics suggest that energy prices could remain high for years to come.
Even with this year's gain, energy stocks remain relatively cheap, especially given the growth that appears to be ahead. Some of the best values are in the pipeline sector, where companies trade at deep discounts. Two dirt cheap pipeline stocks are Kinder Morgan (KMI 1.15%) and Williams Companies (WMB 1.55%). They look like great value buys considering what lies ahead in the sector.
The future is looking brighter
Shares of Kinder Morgan are up about 10% this year, which is impressive considering the more-than-20% plunge in the S&P 500. However, even with that rally, the natural gas pipeline giant's stock is incredibly cheap. Kinder Morgan expects to produce $2.07 per share of distributable cash flow this year. With its share price recently around $17.25, it trades at about eight times cash flow, giving it a 12% free cash flow yield.
Kinder Morgan pays out less than 55% of its cash flow to support its dividend, which currently yields over 6% due to its bottom-of-the-barrel valuation. The company retains the rest of that money to fund expansion projects, strengthen its balance sheet, and repurchase shares.
While the company's expansion prospects have dwindled in recent years, it's starting to secure more projects, fueled by this year's rise in energy prices. Meanwhile, with energy security moving to the forefront following Russia's invasion of Ukraine and natural gas increasingly being viewed as a greener choice thanks to its lower carbon emissions profile, Kinder Morgan should have even more expansion opportunities in the future. The company is exploring several natural gas pipeline expansions, liquefied natural gas (LNG) export facility developments, and renewable natural gas projects. That could enable the pipeline giant to continue growing in the coming years, potentially giving it the fuel to keep increasing its high-yielding dividend.
Lots of growth ahead
Williams Companies stock has rallied about 25% this year. However, even with that surge in its stock price, the natural gas pipeline company trades at a dirt cheap valuation. The company expects to produce between $3.64 and $3.89 per share of available funds from operations. With its stock price recently around $32.25, it trades at 8.5 times cash flow at the midpoint of its forecast. That's a ridiculously cheap value for a company with Williams' growth potential.
Williams only uses about 45% of that cash flow to support its 5.3%-yielding dividend. That gives it lots of excess cash to fund growth and maintain a strong balance sheet. The company currently has several expansion projects under construction, including new natural gas pipeline expansions, gathering and processing capacity additions, and projects to tie new offshore developments to its existing infrastructure. These projects should drive cash flow higher in the coming years.
Williams expects to invest $1.5 billion through 2025 across six projects to expand its large-scale natural gas pipeline transmission systems. Meanwhile, it's pursuing more than 30 additional projects representing upwards of $7 billion in investment potential through 2031. With gas demand growing, it's becoming increasingly likely that Williams will secure several new expansion projects in the coming years to fuel growth and allow it to continue increasing its high-yielding payout.
Extraordinarily cheap given the growth still ahead
Investors had essentially given up on pipeline stocks, believing their growth days were over as the world pivoted to renewable energy. However, that shift will take a long time. In the meantime, the global economy needs access to secure, low-cost, and cleaner fuel sources, which natural gas can deliver. Natural gas pipeline stocks Kinder Morgan and Williams Companies are dirt cheap these days considering how much fuel they still have in the tank to continue growing over the next decade. That makes them look like great long-term buys right now.