2 No-Brainer Stocks to Buy in the Energy Sector
Energy prices can be excruciatingly volatile, which leads many investors to steer clear of the entire sector. However, by writing off the whole industry, investors are missing out on some excellent opportunities to generate above-average total returns.
Two energy stocks that have an excellent track record in both good markets and bad are midstream MLP Enterprise Products Partners (NYSE: EPD) and renewable energy producer Brookfield Renewable Partners (NYSE: BEP). Both companies have taken steps to reduce their exposure to the sector's volatility while at the same time boasting top-notch balance sheets and compelling growth prospects. These factors help reduce risk and boost returns, which make them excellent energy stocks to buy.
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A top-notch midstream company
Enterprise Products Partners controls one of the largest integrated midstream networks in North America. The company operates nearly 50,000 miles of pipelines that transport natural gas, natural gas liquids (NGLs), crude oil, petrochemicals, and refined products from production basins to demand centers for a fee. On top of that, the company has an extensive footprint of processing, storage, and export facilities, which enables it to earn additional fees as these commodities make their way to end users. Overall, long-term fixed-fee contracts support more than 80% of Enterprise's annual earnings, which helps mute the impact of commodity price volatility.
That stable cash flow allows Enterprise Products Partners to pay a well-above-average dividend that currently yields around 6%. That payout is as sustainable as investors will find in the energy patch. For starters, the midstream company distributes only about 60% of its income to investors, which is a conservative level for an MLP. Enterprise Products Partners further supports that payout with one of the highest credit ratings among MLPs, which it backs with a low leverage ratio.
Enterprise's conservative financial profile gives it the flexibility to continue expanding its midstream asset base. The company currently has more than $5 billion of growth projects under construction and another $5 billion to $10 billion in development. These expansions boost the company's cash flow, which supports steady distribution growth. Overall, Enterprise Products Partners has increased its payout for 20 straight years, including in each of the last 60 consecutive quarters.
That steady growth, when combined with the company's solid financial profile, makes Enterprise Products Partners a no-brainer buy in the energy patch.
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An excellent renewable power company
Brookfield Renewable Partners shares many similarities with Enterprise Products Partners. Brookfield Renewable, which is one of the largest renewable power generators in the world, sells its electricity under long-term, fixed-price contracts that provide it with predictable cash flow. Overall, these agreements supported more than 85% of its expected earnings for 2019. The company adds to its strong financial profile by having the highest credit rating in the renewable power sector, which it backs with a low leverage ratio. The only knock against the company is that its distribution payout ratio is currently around 90%, which is above its 70% target, though it will come down as earnings continue expanding.
Brookfield Renewable anticipates that its cash flow will grow at a 6% to 11% annual pace over the next several years. The company expects cost savings and improving electricity prices to power half of that growth, with the rest coming as it builds new renewable power projects. This forecast supports the company's view that it can increase its 5.5%-yielding distribution at a 5% to 9% annual pace.
In addition to its embedded organic growth, Brookfield Renewable has a knack for making needle-moving acquisitions. The company bought a large stake in fellow high-yielding renewable electricity producer TerraForm Power a couple of years ago, and more recently invested in Canadian utility TransAlta and Spanish solar power developer X-Elio. These external growth initiatives should enable Brookfield Renewable to grow its cash flow at an even faster pace in the coming years.
With stable cash flows supported by long-term contracts and a strong balance sheet, Brookfield Renewable is an excellent energy stock. Add to that the jaw-dropping market opportunity for renewables and it makes Brookfield a no-brainer buy in the sector.
Top-notch energy stocks
While energy price volatility can have a significant impact on earnings in the sector, Enterprise and Brookfield Renewable mute much of this by signing long-term, fixed-rate agreements that supply them with much steadier cash flow. That allows both companies to pay high-yielding distributions that they've consistently been able to grow over the years. Those growing income streams have enabled both energy stocks to outperform the market throughout their history. That trend should continue in the coming years, which is why they're such excellent energy stocks to buy.
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Matthew DiLallo owns shares of Brookfield Renewable Partners L.P., Enterprise Products Partners, and TerraForm Power. The Motley Fool recommends Enterprise Products Partners. The Motley Fool has a disclosure policy.
