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Energy Sector Still Red Hot: 7 MLPs to Buy With Fat Dividends as Oil Heads Back to $100
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One sector that has soared this year is energy. It is up a stunning 70% while all the other sectors in the S&P 500 are down. Typically, this would signal that it is time to take some money off the table. However, that likely is not the case this time around. While the benchmarks Brent and West Texas Intermediate crude are well off the highs for 2022, there is a growing chorus of analysts and market strategists that feel oil can explode to the upside in 2023.
Demand could skyrocket if China starts to ease up on the seemingly constant COVID-19 lockdowns across the country. Toss in the potential for continued improvement in the economy, extending sanctions against Russia and the likelihood for the OPEC countries to manage production cuts, and you have all the ingredients for stable and likely rising crude oil prices.
One item that has changed is that some of the exploration and production companies that had variable dividend structures are cutting back on their payouts. Also, some of the mega-cap integrated giants have traded so much higher that their dividends are not near the levels they were even six months ago. One segment that makes sense for investors seeking dependable passive income is energy master limited partnerships (MLPs).
We screened our 24/7 Wall St. energy MLP research universe looking for stocks with big and dependable distributions that still have room to run. The following found seven are Buy rated on Wall Street and are solid ideas now. It is important to remember that no single analyst report should be used as a sole basis for any buying or selling decision.
Antero Midstream
With shares trading near $10 apiece, this very well-run company offers a huge total return package. Antero Midstream Corp. (NYSE: AM) owns, operates and develops midstream energy infrastructure. It operates through two segments.
The Gathering and Processing segment includes a network of gathering pipelines and compressor stations that collects and processes production from Antero Resources’ wells in West Virginia and Ohio.
The Water Handling segment delivers fresh water and offers other fluid handling services, such as wastewater transportation, disposal and treatment, as well as high-rate transfer services.
Antero Midstream stock investors receive an 8.05% distribution. Wells Fargo has a target price of $13, while the posted consensus target is $10.71. The shares closed on Monday at $11.10 apiece.
Energy Transfer
This top MLP is a very safe way for investors looking for energy exposure and income. Energy Transfer L.P. (NYSE: ET) owns and operates one of the largest and most diversified portfolios of energy assets in the United States, with a strategic footprint in all the major domestic production basins.
This publicly traded limited partnership has core operations that include complimentary natural gas midstream, intrastate and interstate transportation and storage assets; crude oil, natural gas liquids (NGLs) and refined product transportation and terminaling assets; NGL fractionation; and various acquisition and marketing assets.
After the purchase of Enable Partners last December, Energy Transfer now owns and operates more than 114,000 miles of pipelines and related assets in all the major U.S. producing regions and markets across 41 states, further solidifying its leadership position in the midstream sector.
The completion of the transaction was immediately accretive to Energy Transfer and furthers Energy Transfer’s deleveraging efforts. It also adds significant fee-based cash flows from fixed-fee contracts. Additionally, the combined operations of the two companies are expected to generate annual run-rate cost and efficiency synergies of more than $100 million, excluding potential financial and commercial synergies.
Through its ownership of Energy Transfer Operating, formerly known as Energy Transfer Partners, the company also owns Lake Charles LNG, as well as the general partner interests, the incentive distribution rights and 28.5 million common units of Sunoco, as well as the general partner interests and 39.7 million common units of USA Compression Partners.
Investors receive an 8.69% distribution. Morgan Stanley’s price target on Energy Transfer stock is $17. The consensus target is $15.47, and shares closed at $12.03 on Monday.
Enterprise Products Partners
This is the largest publicly traded energy partnership and a leading North American provider of midstream energy services to producers and consumers. Enterprise Products Partners L.P. (NYSE: EPD) provides a wide variety of midstream energy services, including gathering, processing, transportation and storage of natural gas, NGL fractionation, import and export terminaling, and offshore production platform services.
One reason many analysts may have a liking for the stock might be its distribution coverage ratio. This ratio is well above 1 times, making it relatively less risky among the MLPs.
Investors receive a 7.60% distribution. UBS has set its price target at $33. The consensus target for Enterprise Products Partners stock is $31.61 and shares ended Monday trading at $24.90.
Hess Midstream
This is the limited partnership midstream arm of one of the country’s top energy companies. Hess Midstream L.P. (NYSE: HESM) owns, develops, operates and acquires midstream assets. The company operates through three segments.
The Gathering segment owns natural gas gathering and crude oil gathering systems, as well as produced water gathering and disposal facilities. Its gathering system consists of approximately 1,350 miles of high and low pressure natural gas and natural gas liquids gathering pipelines with capacity of approximately 450 million cubic feet per day, and the crude oil gathering system comprises approximately 550 miles of crude oil gathering pipelines.
The Processing and Storage segment comprises Tioga Gas Plant, a natural gas processing and fractionation plant located in Tioga, North Dakota; a 50% interest in the Little Missouri 4 gas processing plant located in south of the Missouri River in McKenzie County, North Dakota; and Mentor Storage Terminal, a propane storage cavern and rail, and truck loading and unloading facility located in Mentor, Minnesota.
The Terminaling and Export segment owns Ramberg terminal facility; Tioga rail terminal; and crude oil rail cars, as well as Johnson’s Corner Header System, a crude oil pipeline header system.
The distribution yield here is 7.56%. The $36 Goldman Sachs price target is higher than the $34.00 consensus target. Hess Midstream stock closed on Monday at $28.68.
Magellan Midstream Partners
This is another top midstream MLP company that checks in high on the distribution list. Magellan Midstream Partners L.P. (NYSE: MMP) engages in the transportation, storage and distribution of refined petroleum products and crude oil in the United States.
The company operates refined products pipelines that transport gasoline, diesel fuel, aviation fuel, kerosene and heating oil to refiners, wholesalers, retailers, traders, railroads, airlines and regional farm cooperatives, as well as to end markets, including retail gasoline stations, truck stops, farm cooperatives, railroad fueling depots, military bases and commercial airports.
The company also provides pipeline capacity and tank storage services, as well as terminaling, ethanol and biodiesel unloading and loading, additive injection, custom blending, laboratory testing and data services to shippers. In addition, Magellan Midstream Partners owns and operates crude oil pipelines and storage facilities as well as marine terminals located along coastal waterways that provide distribution, storage, blending, inventory management and additive injection services for refiners, marketers, traders and other end users of petroleum products.
Magellan Midstream Partners stock comes with a 7.91% distribution. Goldman Sachs’s $61 target price compares with a $56.21 consensus target and the most recent close at $53.15.
MPLX
This is the top holding for the Alerian MLP energy exchange-traded fund. MPLX L.P. (NYSE: MPLX) is primarily engaged in crude oil and refined products transportation and terminaling in the U.S. Midwest and Gulf Coast regions, as well as natural gas gathering and processing in the northeast from its prior acquisition of MarkWest Energy in 2015. MPLX was formed by independent U.S. refiner Marathon Petroleum.
The company’s assets include a network of crude oil and refined product pipelines; an inland marine business; light-product terminals; storage caverns; refinery tanks, docks, loading racks and associated piping; and crude and light-product marine terminals. It also owns crude oil and natural gas gathering systems and pipelines, as well as natural gas and NGL processing and fractionation facilities in key U.S. supply basins.
Investors receive a 9.14% distribution. MPLX has a $37 price target at Goldman Sachs, but the consensus target is higher at $38.42. Monday’s closing price was $33.61.
24/7 Wall St.Sunoco
This well-known company could be the best buy for investors who are more conservative. Sunoco L.P. (NYSE: SUN) distributes and retails motor fuels in the United States. The company operates in two segments.
The Fuel Distribution and Marketing segment purchases motor fuel from independent refiners and oil companies and supplies it to independently operated dealer stations, distributors and other consumers of motor fuel, and partnership operated stations, as well as to commission agent locations.
The All Other segment operates retail stores that offer motor fuel, merchandise, foodservice and other services that include credit card processing, car washes, lottery, automated teller machines, money orders, prepaid phone cards and wireless services. It also leases and subleases real estate properties and operates terminal facilities on the Hawaiian Islands. As of December 31, 2020, the company operated 78 retail stores in Hawaii and New Jersey.
Sunoco GP serves as the general partner of the company.
Investors receive a 7.78% distribution. The Raymond James target price is $48. The consensus target is $46.00, and Sunoco stock closed at $42.91 on Monday.
These seven top companies offer reasonably safe and reliable distributions and are solid players in the energy infrastructure and royalty arena. Investors looking for solid total return potential can do well owning these MLP leaders. Note though that MLP distributions may contain return of principal. Investors looking to avoid the pesky K-1s can always purchase shares in the ALPS Alerian MLP exchange-traded fund (NYSE: AMLP) and receive a form 1099 instead.
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