Energy

Despite Oil Weakness, 5 Stocks to Buy for Booming Energy Exports

Lee Jackson

Published: June 23, 2017 10:25 am

Last Updated: January 12, 2020 10:45 am

One reason that crude oil has taken a beating over the past 60 days is an issue of oversupply, and despite the fact that Russia and OPEC have both committed to cuts in production, U.S. shale companies have ramped up production and the domestic rig count has soared. One way to work off the domestic glut is to export, and some of the top U.S. companies could be big winners.

A new Jefferies research report sees export growth as they only way to stabilize and most importantly, normalize U.S. inventories. In addition, the firm sees price volatility as foreign demand (via export) comprises a larger component of total U.S. crude off-take. The report noted this:

U.S. crude continued to gain market share in new regions, including Asia & India. With an expectation for domestic refined product demand to remain subdued against a sharp rise in US light-oil output, we expect crude exports will climb meaningfully through the decade’s end in order to keep US inventories balanced.

The analysts see five big winners, and given the pullback in oil prices, and in turn share prices, now may be an excellent time for investors to find an entry point.

Enterprise Products Partners

This is one of the largest publicly traded master limited partnerships (MLPs) and a leading North American provider of midstream energy services to producers and consumers. Enterprise Products Partners L.P. (NYSE: EPD) once again, despite the energy slump, recently raised its distribution 1%. The company maintains a very good long-term position in the market. It provides many of its services on the basis of long-term, fixed-fee contracts, insulating against some of the wilder swings of the commodities that it trades in.

One reason why many analysts may like the stock might be its distribution coverage ratio. The company’s distribution coverage ratio is well above one times, making it a relatively less risky MLP. The report noted this:

The company has steadily transformed itself into a major US exporter of numerous hydrocarbon products, acting as the straddle for constrained domestic supplies increasingly seeking international liberation. It is today the largest exporter of ethane and LPG, and a major exporter of both crude oil and refined products.

Investors receive a 6.36% distribution. The Wall Street consensus price target is $32.96, and shares closed Thursday at $26.00.

Kinder Morgan

This is one of the most recommended energy companies on Wall Street, and it looks to reclaim its preeminent position. Kinder Morgan Inc. (NYSE: KMI) is one of the largest energy midstream companies, with diverse operations across the midstream energy value chain. Businesses include natural gas pipelines, liquids terminalling, CO2 production, as well as products pipelines.

The analysts see many positives and noted this:

According to its 2017 Analyst Day presentation, Kinder Morgan’s Houston Ship Channel (HSC) terminal network is the largest integrated refined product terminalling system in the world with ~43 MMBbls of capacity being fed by 20 inbound pipelines via 10 Houston area refineries. In addition, the company operates 11 ship docks with an ability to tap international markets via exports.

Shareholders receive a 2.68% dividend. The consensus price target is $25.14, and shares closed Thursday at $18.58.

Magellan Midstream Partners

This is a top midstream MLP company that checks in high on the distribution list. Magellan Midstream Partners L.P. (NYSE: MMP) primarily transports, stores and distributes refined petroleum products and crude oil. The partnership owns the longest refined petroleum products pipeline system in the country, with access to nearly 50% of the nation’s refining capacity, and can store more than 95 million barrels of petroleum products, such as gasoline, diesel fuel and crude oil.

The company sports a BBB+ credit rating from S&P, and the outlook is listed as stable. One main reason for the very positive ratings is that almost 85% of Magellan Midstream’s operating margin is protected by long-term, fixed-fee contracts, meaning that its cash flow is not just recurring but is highly predictable and also largely immune from energy prices. This helps to keep the distribution safer.

The analysts noted this:

To-date, the company has yet to disclose its crude and refined products export capability or volumes; however, we expect it may begin disclosing this information as soon as exports become a more stable source of cash flow (~2018). To meet increased demand for export capabilities, Magellan is in the process of adding a 5th dock at its Galena Park Marine terminal, which will be capable of handling Panamax-sized ships and barges with up to 40-feet draft.

Magellan investors receive a 5.08% distribution. The consensus price target is $82.16. Shares closed Thursday at $68.50.

Occidental Petroleum

This top company has one of the highest yielding domestic stocks in the energy sector. Occidental Petroleum Corp. (NYSE: OXY) is an oil-levered multinational organization with principal business segments in oil and gas and in chemicals. The oil and gas segment explores for, develops, produces and markets crude oil and natural gas, primarily in the U.S. Permian Basin, Colombia, Bolivia, Libya, Oman, Qatar and Yemen. The chemicals segment manufactures and markets basic chemicals, vinyls and performance chemicals.

With a rock-solid balance sheet and a commitment to dividend coverage, investors look safe for now. Occidental has paid quarterly cash dividends continuously since 1975, and it has increased its dividend each year since 2002. The company reported solid earnings and the analysts said this:

The company commissioned its export facilities at Ingleside in third quarter last year and shipped its first crude export cargos in October. The terminal has a throughput capacity of 300 kbd and 2.1 mbbls of storage capacity, and has easy access to the Gulf of Mexico. It can accommodate Aframax and Suezmax vessel sizes; the company has also loaded a very large crude carrier or VLCC, which is an oil tanker with a capacity between 200 000 and 400 000 tons, although not to full draft. However, with further dredging the terminal may be able to fully load a VLCC (2 mbbls) by 2019.

The dividend yield is 5.05%. The consensus price objective of $71.16 compares with the closing price on Thursday at $60.21.

Plains All American Pipeline

This is another top MLP on Wall Street that had the power to withstand the downturn. Plains All American Pipeline L.P. (NYSE: PAA) owns and operates midstream energy infrastructure and provides logistics services for crude oil, natural gas liquids (NGLs), natural gas and refined products. It owns an extensive network of pipeline transportation, terminaling, storage and gathering assets in key crude oil and NGL-producing basins and transportation corridors and at major market hubs in the United States and Canada. On average, Plains All American handles over 4.1 million barrels per day of crude oil and NGL on its pipelines.

The company also has one of the largest storage asset bases, with over 120 million barrels of liquids storage capacity at three major hubs, which are located in Cushing, Oklahoma; Midland, Texas; and Patoka, Illinois. The analysts said:

While the company does not have meaningful export capacity for crude and refined products today, construction of a new export terminal in Corpus Christi is currently underway. With Enterprise Products as a partner, Plains is in the process of building a new terminal capable of loading ocean going vessels at a rate of ~960 MBbld and will have ~1 MMBbl of storage on site.

Investors receive a 9.11% distribution. The consensus price target is $32.76. Shares closed Thursday at $23.90.

These five companies all pay solid dividends or MLP distributions, which investors should know may contain return of capital. This is an excellent way to play a hammered energy sector from an ancillary way, and even if the stocks don’t move right away, investors will get paid nicely to wait.