Despite a surge last year, oil prices have been generally depressed since early 2015. The low prices have pushed down stock prices in the energy sector, which has paradoxically opened an opportunity for income investors.
The energy sector’s production companies benefit from dealing in commodities – oil and gas – that are always in demand. They have high overhead, but they also have a ready market for the product and consequent strong cash positions. Low share prices are attractive to investors, and the companies have been following two strategies to boost their shares.
First, they are simply buying back shares to support the price. And second, they are paying out high dividend yields, offering investors a steady income stream from the stocks. Average dividend yield in the energy sector is up to 3.9%, almost double the S&P 500’s average yield of 2.1%. Income investing is a viable option for energy investors; since 1998, dividends in the energy sectors have brought triple the returns of simple price appreciation.
We’ve taken a dive into TipRanks’ Stock Screener tool to find three energy stocks offering investors the best combination – "strong buy" consensus, and dividend yields above 9%.
MPLX LP (MPLX)
When you think of the energy industry, chances are you picture an oil well out West, or the gas station down the street. But between the actual extraction and the end user, there is a string of processes, refineries, pipelines, and transport systems that make up the midstream infrastructure of the industry. MPLX, a partnership formed by Marathon Petroleum Corporation (MPC), owns and operates an array of these midstream assets, including pipelines, inland shipping, product terminals, refinery storage, and the docks and loading systems associated with them. In effect, MPLX handles the product transport while Marathon handles extraction and production. Marathon owns a 64% controlling interest in MPLX.
In addition to transport infrastructure, MPLX also operates a series of natural gas gathering systems, processing the untreated gas to extract various components. These include ethane, ethylene, propane, butane, gasoline, propylene. The company then sells these natural gas products. The most important feature of MPLX’s business model, however, lies in the simple utility of energy transport niche. No matter what the price of crude oil or natural gas, the product still must reach the end user, and MPLX will get paid for that transportation.
The infrastructure and natural gas-product niche has been good for MPLX. Since 2018, the company has consistently posted earnings between 52 cents and 62 cents per share. The most recent report, for Q2 CY19, showed revenues of $1.63 billion, just below the estimate of $1.64 billion. The year-over-year gain was modest, at $60 million. Shares slipped $1 after the report, and have been volatile since.
MPLX has used its steady earnings to support a reliable, paying out 66.75 cents per share quarterly, or $2.67 per year. The company has been raising the dividend payment steadily since 2014, and the yield has increased from 2.1% then to the current 9.96%.
Wall Street analysts have been pleased with MPLX and its performance. For example, Barclays’ analyst Christine Cho reinstated her bullish stance on the stock and pointed out that the company has plenty of options to streamline operations without compromising profitability. Cho rates MPLX an Overweight (i.e. "buy") along with a $33 price target, indicating room for over 20% upside. (To watch Cho's track record, click here)
The analyst noted, “While the company today has a far broader set of assets to rely upon during periods of change across the industry, management has also made it clear that perhaps their assets are spread across too many basins and they could be looking to sell interests down the road. We believe investors would support asset sales as the company focuses on competing in its core basins in the Permian and Northeast.”
Wall Street backs Cho's bullish bite into the energy player as well as TipRanks analytics exhibit MPLX as a Strong Buy. Out of 7 analysts polled in the last 3 months, 6 are bullish on the stock, while only one remains sidelined. With a return potential of 25%, the stock's consensus target price stands at $33.57. (See MPLX stock analysis on TipRanks)
Energy Transfer (ET)
As its name suggests, the next stock on our list is also involved in the energy pipeline industry, specifically the natural gas and propane niche. Energy Transfer is also the largest company on this list, with a market cap of $33.5 billion. For calendar year 2018, the company reported $54.09 billion in revenues, and net income of $4.04 billion.
Like MPLX, Energy Transfer has been using its income and cash flow to maintain a hefty dividend. The company is paying out $1.22 per share annually, or 30.5 cents quarterly. The payout ratio, which compares the dividend payment to the earnings per share, is a healthy 84%, indicating that the company is returning most of its earnings to shareholders. And with a yield of 9.58%, this makes ET stock a boon for shareholders.
5-star analyst Elvira Scotto takes a bullish position on ET shares. In a recent detailed report, after a meeting with a management and a tour of a company facility, Scotto wrote, “We believe ET is well-positioned to generate meaningful cash flow growth as large-scale growth projects come online over the next few years. Moreover, with an improved cost of capital following its simplification transaction and its expansive asset footprint, we expect ET to continue to identify accretive growth opportunities over the coming years while maintaining a strong balance sheet and significant excess distribution coverage.”
Scotto sets a $23 price target on ET, showing her confidence in an 80.5% upside to this stock. Her target is significantly higher than the average; ET has an average price target of $20.50, suggesting a 60% upside from the trading price of $12.74. The analyst consensus on this stock is unanimous – the Strong Buy is based on 6 buy reviews from the past three months. (See ET stock analysis on TipRanks)
Oasis Midstream Partners (OMP)
The third company on our list is a small player in the midstream energy transport niche. Most of the company’s assets are located in North Dakota, in that state’s section of the Williston Basin. The basin as a whole also spreads into the states of South Dakota and Montana, as well as the Canadian provinces of Alberta, Saskatchewan, and Manitoba, and is one of the richest oil-producing regions in central North America.
Oasis operates terminal and pipeline facilities for crude oil and natural gas. In addition, the company has a focus on water disposal and distribution. The oil drilling industry generates wastewater from the wells, both fresh and brine. The company operates facilities to dispose of wastewater and distribute the usable water.
This company has had difficulty generating traction in recent quarters, possibly due to small size compared to many of its competitors. Oasis has a market cap of just $560.7 million, and stock dropped sharply after the Q2 report at the beginning of August, losing 15%, although shares have held steady since then. Oasis reported 76 cents EPS in that report, just below the 77 cents forecast, and showed revenue of $97.6 million, missing the estimate by 2.3%.
Notwithstanding the problems that Oasis has been having meeting the earnings forecasts, the company still shows plenty of strength to attract investors. Earnings have been rising in the last four quarters. OMP’s dividend yield is an impressive 11.81%, almost six times the S&P average, and the annualized payout is $1.96 per share. The payout ration of 61.7% shows that the company should have no difficulty maintaining this dividend.
Another 5-star RBC Capital analyst, TJ Schultz, sees room for growth in OMP. He notes that the company has a positive balance and a cash flow that can maintain its efforts to return income to investors. He writes, “We think OMP’s solid balance sheet, pipeline of dropdown assets, and stable E&P sponsor should enable the Partnership to grow cash flows and ultimately deliver top-tier distribution growth…” In line with this outlook, Schultz puts a $22 price tag on OMP, suggesting an upside of 32%. (To watch Schultz's track record, click here)
We can see from TipRanks that OMP has regained its “Strong Buy” rating. In the last three months, the stock has received 3 "buy" and one "hold" ratings. Based on these ratings, the average $22.50 price target on OMP stock translates into upside of over 30% from the current share price. (See Oasis Midstream stock analysis on TipRanks)