The energy industry is a passive income lover's dream these days. Many companies in the sector trade at bottom-of-the-barrel valuations, in part because some investors don't want fossil fuel companies in their portfolios. Meanwhile, the industry is paying out gushers of dividends, fueled partly by tight energy market conditions. That sets investors up to generate lots of passive income from the sector in the coming years.

For example, a $10,000 investment spread across monster dividend payers like Crestwood Equity Partners (CEQP)MPLX (MPLX -0.69%), and Pioneer Natural Resources (PXD) could produce $2,000 of passive income in less than three years.

Energy Stock

Investment

Current Yield

Annual Passive Income

MPLX

$3,333.33

8.9%

$296.67

Crestwood Equity Partners

$3,333.33

9.5%

$315.33

Pioneer Natural Resources

$3,333.33

8%

$266.82

Total

$10,000.00

 

$878.82

Data source: Google finance, company investor relations websites, and author's calculations. (NOTE: Pioneer's current yield is based on its dividend potential at $80 per barrel oil.)

Here's a closer look at these companies and the monster distributions they pay their shareholders.

Plenty of fuel to support its big-time distribution

MPLX is a master limited partnership (MLP) with diversified midstream operations. The company's assets generate relatively predictable cash flow backed by long-term contracts and regulated rate structures.

The MLP produced enough cash to cover its payout by a comfortable 1.64 times through the first nine months of 2022. That enabled it to retain money to fund expansion projects, repurchase units, and maintain a strong balance sheet. Its leverage -- i.e., its debt-to-adjusted-EBITDA ratio -- was 3.5 at the end of the third quarter, below its sub-4 target level. 

That solid financial profile gave MPLX the confidence to increase its already sizable distribution by 10% late last year. The company could continue growing its payouts in the future. It has several expansion projects currently under construction, including additional pipeline capacity and new gathering and processing facilities. They should supply the MLP with incremental cash flow as they come online over the next two years, giving it the fuel for more distribution growth. 

Reaching an inflection point

Crestwood Equity Partners is another MLP. It primarily focuses on gathering and processing activities, earning fees backed by long-term contracts as volumes of hydrocarbons flow through its system. That supplies the company with fairly predictable cash flow.

The MLP expected to generate enough cash to cover its massive payout by 1.8 to 2.0 times last year. However, coverage will likely end up near the bottom of that range due to severe weather conditions in the fourth quarter. That would still provide it with enough money to cover its big-time payout and the bulk of its capital spending. 

Growth-related spending should wind down in 2023 as Crestwood wraps up its current slate of capital projects. Because of that, the company expects to produce significant and growing free cash flow in 2023 and beyond. That should enable the company to drive its leverage ratio down to its long-term target of 3.5. (It expected to end last year with a ratio of between 3.9 and 4.1.)

Once Crestwood hits its leverage target, the MLP will have more flexibility to return cash to investors. The company could continue growing its distribution (it gave investors a 5% payout raise last year) and repurchasing equity. Crestwood will also have the flexibility to continue its consolidation strategy in the gathering and processing space. The company made several acquisitions in recent years to enhance its positions in key operating areas and grow value for investors. 

An oil-fueled dividend

Pioneer Natural Resources is an oil and natural gas producer with a big-time dividend payout policy. The company pays a steady base dividend that it can sustain at lower oil prices. In addition, it makes variable dividend payments of up to 75% of its quarterly free cash flows. In 2022, Pioneer Natural Resources paid over $26 in dividends, giving it a more than 10% yield at the current stock price.

It could continue paying gushers of dividends in 2023 and beyond, depending on oil prices:

A slide showing Pioneer's dividend potential at various oil prices.

Data source: Pioneer Natural Resources Investor Relations Presentation.

With West Texas Intermediate crude prices currently around $80 a barrel, the company could pay over $19 in dividends per share this year, giving it about an 8% yield at the current stock price. That payout could head even higher if oil prices rebound, which the company expects will happen. Because of that, it can provide investors with a high-octane passive income stream.

Big-time passive income producers

Crestwood Equity Partners, MPLX, and Pioneer Natural Resources pay monster dividends. Because of that, a $10,000 investment spread across the trio could generate about $2,000 in passive income in about two and a half years. And the payout total could hit that level even sooner if Crestwood and MPLX continue increasing their distributions, and higher oil prices give Pioneer the cash to continue making substantial variable dividend payments. That makes this group great for investors seeking to generate gushers of passive income over the next few years.