The world is focused on reducing carbon emissions, and the energy sector is filled with low-hanging fruit in that effort. That means oil drillers are in society’s crosshairs. But there’s a complex chain in the sector that gets these fuels from the ground to where they are eventually used. And since demand for oil, even in the most optimistic clean energy projections, is expected to remain material for years to come, there is still investment merit in the energy space — if you focus on the right niche. Here are three high-yield pipeline owners that deserve close attention today.
1. Shifting gears
Enterprise Products Partners (NYSE:EPD) is a midstream-focused master limited partnership. It offers an 8.3% distribution yield backed by 22 consecutive annual increases. The company owns a massive collection of largely fee-based pipelines, storage, processing, and transportation assets that would be impossible to recreate. And it has a history of being financially conservative.
What’s interesting about Enterprise today is its increasing focus on chemicals and refining. Nearly 80% of its $3.1 billion capital spending plan will be spent in these two spaces. It is going down this road because it expects demand for these products to continue growing for years to come. Meanwhile, it has material exposure to natural gas, which is expected to see increased demand as the world shifts away from coal. In other words, Enterprise is positioning itself to support the most desirable energy niches. But the anti-carbon sentiment in the market has helped to put downward pressure on its units, pushing its yield is toward the high end of its historical range, suggesting shares are relatively cheap. In fairness, there are other negatives to consider here, including meager distribution growth of late and the complexity of the MLP structure, but with such a large yield investors are being well compensated for these wrinkles given Enterprise’s long and successful history.
2. Similar, but different
Kinder Morgan (NYSE:KMI) shares many traits with Enterprise, as it, too, owns midstream infrastructure that is irreplaceable. And with a similar toll-taking business model, the ups and downs of energy prices aren’t a huge deal. That said, Kinder Morgan had historically taken a more aggressive approach with its balance sheet. That got the company in trouble in 2016 when it was forced to cut its dividend so it could put that cash to use on growth projects. Income investors that prize consistency will probably be more comfortable with one of the other names here.
But Kinder Morgan has made great strides to win investors back. It has returned to dividend growth, increasing its disbursement annually since 2018. It has also worked to reduce its reliance on debt, trimming its debt-to-EBITDA ratio from over 9 times to just 5.1 times (for reference, Enterprise’s debt to EBITDA ratio is roughly 4 times). In other words, it’s a bellwether name trying to mend its ways. With a 6.8% yield, investors with a bit more risk tolerance might find it of interest. Notably, it is not an MLP, which might appeal to investors that prize simplicity.
3. Getting ready for the future
The last name here is Canadian midstream giant Enbridge (NYSE:ENB), which, like Enterprise and Kinder Morgan, owns a massive collection of energy infrastructure assets. Its oil and natural gas pipelines make up 54% and 29% of EBITDA, respectively. The rest of the business is made up of a natural gas utility (14% of EBITDA) and renewable power (3%). Clearly, moving oil and natural gas are at the core of the company’s business, but it is also shifting in other directions. Specifically, natural gas is displacing dirtier oil, among other higher-cost options, for home heating in its utility operation, and the company is busy building offshore wind farms in Europe that should grow its clean energy bonafides over time.
Enbridge has a history of using leverage more aggressively than peers, so investors should monitor its balance sheet. However, the company has increased its dividend annually for 26 consecutive years, suggesting it has managed leverage well over time.
Looking forward, the company believes it has enough capital spending opportunities to support 5% to 7% distributable cash flow growth for many years to come. The dividend will likely increase at a similar rate. Offering a 7.1% yield, dividend growth investors will probably find Enbridge the most interesting name here. That said, as a Canadian company, there are tax withholding issues to consider, and exchange rates impact what U.S. investors receive in the way of dividends.
This change will take time
There is no question that the energy sector is in a transitional period, with the end goal being an increase in the use of clean energy. But the shift will take years to complete, and midstream giants Enterprise, Kinder Morgan, and Enbridge all have robust businesses to support big yields today and in the days ahead. If you want to put some cash to work in dividend-paying stocks, each is worth a closer look.
Enterprise is probably the best option for conservative folks. Kinder Morgan might be attractive to those willing to excuse past transgressions given improved recent performance. And Enbridge is a good alternative for dividend growth investors that want a bit of a clean energy hedge.
This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.
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