Midstream companies provide the infrastructure needed to move energy from producers to consumers. Their stocks are particularly attractive due to their fee-based business model, often resulting in consistent cash flow. Known for their strong dividend yields, these mature and stable companies offer long-term value, making them a favorite among investors in today’s market.
Below, I have highlighted three fundamentally sound midstream energy stocks: Enterprise Products Partners L.P. (EPD), Western Midstream Partners, LP (WES), and Plains All American Pipeline, L.P. (PAA), which are well-positioned for long-term gains despite the inherent challenges in the energy market.
Midstream companies typically secure their pipeline and storage assets through long-term take-or-pay contracts. These agreements guarantee that shippers pay for reserved capacity, whether they utilize it or not, ensuring a steady revenue stream. This model allows midstream companies to maintain stable earnings, protecting their bottom line from fluctuations in the volume and prices of transported oil and natural gas.
The global midstream energy market is anticipated to grow to $41.44 billion by 2029, exhibiting a CAGR of 3.2%. Moreover, the global operating oil and gas pipeline length is expected to expand to 2,400 thousand km by the end of 2027, registering a CAGR of about 1.9%.
The sector’s growth is fueled by the continuous global demand for energy and the need for increased infrastructure to support new production areas. Even in times of low energy prices, demand remains significant, positioning midstream energy stocks as a relatively safe haven for stable income.
Considering these factors, let’s evaluate the three MLPs - Oil & Gas picks, beginning with the third choice.
Stock #3: Enterprise Products Partners L.P. (EPD)
EPD provides midstream energy services to producers and consumers of natural gas, natural gas liquids (NGLs), crude oil, petrochemicals, and refined products. It operates in four segments: NGL Pipelines & Services; Crude Oil Pipelines & Services; Natural Gas Pipelines & Services; and Petrochemical & Refined Products Services.
On August 21, EPD announced the acquisition of Piñon Midstream, LLC, a portfolio company of Black Bay Energy Capital, in a debt-free transaction valued at $950 million in cash. Management views this acquisition as a strategic move to expand its natural gas processing footprint in the eastern flank of the Delaware Basin. Moreover, the deal is expected to add $0.03 per unit to distributable cash flow in 2025, excluding potential synergies.
On August 14, the company paid a quarterly dividend of $0.525 per unit. With 25 years of consecutive dividend growth, EPD pays an annual dividend of $2.10, which translates to a yield of 7.17% at the current share price. Its four-year average dividend yield is 7.70%. Moreover, its dividend payouts have increased at a CAGR of 4.6% over the past three years.
For the second quarter of 2024, which ended on June 30, EPD's total revenues increased 26.6% year-over-year to $13.48 billion. Its non-GAAP DCF (discounted cash flow) rose 4.4% from the year-ago value to $1.81 billion.
The company’s operating income stood at $1.77 billion, up 11.8% year-over-year, while its attributable net income to common unitholders amounted to $1.41 billion, representing an increase of 12.1% from the last year. Also, its earnings per common unit for the quarter increased 12.3% year-over-year to $0.64.
The consensus revenue estimate of $14.08 billion for the fiscal third quarter (ending September 2024) represents a 17.4% increase year-over-year. The consensus EPS estimate of $0.68 for the ongoing quarter indicates a 12.9% improvement year-over-year. The company has an impressive surprise history; it surpassed the consensus revenue estimates in three of the trailing four quarters.
Over the past year, the stock has surged 10.7%, closing the last trading session at $29.29.
EPD’s POWR Ratings reflect this robust outlook. The stock has an overall rating of B, which equates to Buy in our proprietary rating system. The POWR Ratings are calculated by considering 118 different factors, with each factor weighted to an optimal degree.
EPD has a B grade for Value, Momentum, and Stability. It is ranked #11 out of 24 stocks in the A-rated MLPs - Oil & Gas industry. Click here to see the additional ratings for EPD (Growth, Sentiment, and Quality).
Stock #2: Plains All American Pipeline, L.P. (PAA)
PAA engages in the pipeline transportation, terminaling, storage, and gathering of crude oil and natural gas liquids (NGL) in the United States and Canada. The company operates through Crude Oil and NGL segments.
On August 14, demonstrating its commitment to returning value to shareholders, the company paid a quarterly dividend of $0.3175 per common unit. PAA pays an annual dividend of $1.27, which translates to a yield of 7.11% at the current share price. Its four-year average dividend yield is 7.70%. Also, the company’s dividend payouts have increased at a CAGR of 19.2% over the past three years.
PAA’s revenue for the second quarter (ended June 30, 2024) increased 11.5% year-over-year to $12.93 billion. Its adjusted EBITDA improved by 15.3% from the year-ago value to $807 million. The company’s adjusted net income attributable to PAA grew 18.5% from the prior-year quarter to $288 million, while its non-GAAP net income per common unit stood at $0.31, up 24% year-over-year.
The company raised its 2024 full-year guidance, increasing the midpoint of its adjusted EBITDA forecast by $75 million to a range of $2.725 billion and $2.775 billion. It anticipates to generate approximately $1.55 billion in adjusted free cash flow.
Analysts expect PAA’s revenue for the current year ending December 2024 to increase 6.2% year-over-year to $51.71 billion and its EPS to be $1.35. For the fiscal year 2025, its revenue and EPS is forecasted to grow by 4.7% and 3.4% year-over-year to reach $54.14 billion and $1.39, respectively.
PAA shares have surged 17.8% year-to-date to close the last trading session at $17.85.
PAA’s bright prospects are reflected in its POWR Ratings. The stock has an overall rating of B, which translates to a Buy in our proprietary rating system.
It also has an A grade for Growth and a B for Value, Momentum, and Stability. Within the same A-rated industry, it is ranked #7 out of 24 stocks. Click here to see PAA’s ratings for Sentiment and Stability.
Stock #1: Western Midstream Partners, LP (WES)
Primarily operating in the United States, WES is involved in gathering, compressing, treating, processing, and transporting natural gas; gathering, stabilizing, and transporting condensate, natural gas liquids (NGLs), and crude oil; and gathering and disposing of produced water. It also buys and sells natural gas, NGLs, and condensate.
Buoyed by strong financial performance and a free cash flow of $424.82 million, the company paid its shareholders a dividend of $0.875 per unit on August 14 for the second quarter of 2024.
WES pays an annual dividend of $3.50, which translates to a yield of 9.13% at the current share price. Its four-year average dividend yield is 8.05%. Moreover, the company’s dividend payouts have increased at an impressive CAGR of 32.2% over the past three years.
In the fiscal second quarter that ended on June 30, 2024, WES’s total revenue and other increased 22.7% year-over-year to $905.63 million. The company reported an operating income of $469.75 million, indicating a 39.5% growth from the prior year quarter. WES’ attributable net income came in at $378.65 million, up 49.7% year-over-year, while its net income per unit grew 51.6% from the year-ago value to $0.97.
Street expects WES’ revenue and EPS for the fiscal third quarter (ending September 2024) to increase 24.1% and 21.6% year-over-year to $963.03 million and $0.85, respectively. Moreover, it topped the consensus EPS estimates in three of the trailing four quarters, which is promising.
Shares of WES have gained 41% over the past year to close the last trading session at $38.32.
WES’ POWR Ratings reflect its promising outlook. The stock has an overall rating of A, which translates to a Strong Buy in our proprietary rating system.
It has an A grade for Quality and a B for Momentum and Stability. Out of 24 stocks in the MLPs - Oil & Gas industry, WES is ranked #5. Click here to access additional ratings for WES (Growth, Value, and Sentiment).
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EPD shares were trading at $29.34 per share on Monday afternoon, up $0.05 (+0.17%). Year-to-date, EPD has gained 17.61%, versus a 18.64% rise in the benchmark S&P 500 index during the same period.
About the Author: Shweta Kumari
Shweta's profound interest in financial research and quantitative analysis led her to pursue a career as an investment analyst. She uses her knowledge to help retail investors make educated investment decisions.
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