Investors looking for income generating energy stocks without potential exposure to oil and gas price volatility often turn their attention to U.S. midstream stocks, as American operators have access to one of the world’s most comprehensive and unbundled pipeline infrastructure.
The 5%-plus dividend yields posted by many companies in the segment may not overexcite some investors but still appear solid, and midstream stocks do not suffer at the hands of declining oil prices as much as upstream ones do, even if gains are muted too in the event of spiking oil and gas prices.
Noteworthy mid-priced oil and gas midstream stocks providing a decent level of over 5% yields, should you wish to consider them, include – Antero Midstream (NYSE:AM), Buckeye Partners (NYSE: BPL), DCP Midstream (NYSE: DCP), Enable Midstream Partners (NYSE: ENBL), EnLink Midstream (NYSE: ENLC), MPLX (NYSE:MPLX) and Targa Resources (NYSE:TRGP).
A contractor works on a crude oil pipeline in Freeport, Texas, U.S.: Investor interest in U.S. midstream stocks appears muted despite solid dividend yields but potential consolidation, M&A and leveraged buyout attempts could perk up share prices. (Photo: Luke Sharrett/Bloomberg)
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My pick of these would be DCP Midstream with a near 11% dividend yield and P/E ratio 48.67 at the time of writing, alongside Enable Midstream Partners (+ 9% dividend yield, P/E ratio 12.59) and the biggest of the group MPLX (+9% dividend yield, P/E ratio 12.85) with a market capitalization of nearly $30 billion.
Of course, dividend income is not the sole driver of oil and gas investors’ interest with many opting for integrated or upstream focused outfits, meaning headline valuations – excluding the likes of MPLX – tend to remain low. But things might be about to shift
Given muted investor interest, rating agency Moody’s reckons midstream companies are deleveraging away from prying eyes result, and “improving their credit quality.” That is bound to have another domino effect, says Amol Joshi, Vice President and Senior Credit Officer at Moody’s.
“As midstream capital spending will likely decline through 2020, rising retained cash flow will increasingly fund capital expenditures, but continued weak valuations risk attracting buyouts of such publicly traded midstream companies with improving credit quality.
“Investors are averse to receiving distributions that will only be recycled later via equity offerings to fund growth projects and this ambivalence eases the competition for possible infrastructure fund and private-equity suitors.”
While large midstream companies may be too big to be attractive buyout candidates, mid-sized or smaller companies (~$3 billion to $6 billion) could allow for successful leveraged buyouts (LBOs) while still providing adequate returns.
Consolidation and M&A could also be on the horizon, and offer chances of possible opportunistic share price upticks in the event of a public bid.
Meanwhile, midstream companies will keep striving to self-fund the equity component of projects and grow EBITDA, to the benefit of their leverage metrics and distribution coverage, even as they’ll still need to rely on the debt markets for the remaining funding, Moody’s noted.
All the while, a clearly visible ongoing effort on part of midstream players to rein in capital spending and undertake higher-return projects can only be a good thing from a value creation perspective.
