3 Pipeline Stocks Quietly Printing Cash While the Energy Sector Soars
Key Points
About 90% of Energy Transfer's earnings come from stable fees.
Enbridge gets about 98% of its earnings from cost-of-service and contracted assets.
Around 96% of Kinder Morgan's earnings come from cost-of-service agreements, fee-based contracts, or hedges.
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Oil prices have been making headlines this year, and rightfully so. Crude has surged more than 70% this year to over $100 a barrel due to the war with Iran.
While oil producers are cashing in on higher crude prices right now, pipeline stocks will continue to quietly print cash long after the war ends and oil prices normalize. Here are three energy midstream companies that should thrive no matter what happens with crude prices.
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Energy Transfer
Energy Transfer (NYSE: ET) operates over 140,000 miles of pipelines across the U.S. The master limited partnership (MLP) -- an entity that sends a Schedule K-1 Federal tax form each year -- also owns other midstream energy infrastructure, such as processing plants and export terminals. Most of its assets operate under long-term, fee-based contracts or government-regulated rate structures (about 90% of its earnings).
Last year, Energy Transfer generated over $8.2 billion in cash. The MLP distributed nearly $4.6 billion to investors, retaining the rest to reinvest in the partnership.
The midstream giant plans to invest over $5 billion into growth capital projects this year. It currently has expansions underway that should enter commercial service through 2030. These expansions should grow its cash flow, giving it more fuel to increase its high-yielding distribution (currently 6.8%). Energy Transfer currently plans to boost that payout by 3% to 5% each year.
Enbridge
Enbridge (NYSE: ENB) transports about 30% of the oil produced in North America and 20% of U.S. gas consumption. It also operates the largest gas utility franchise in North America and is a leader in renewable energy. The Canadian company generates extremely durable cash flows, as 98% of its cash flows are take-or-pay or contracted. Enbridge's earnings are so predictable that it has achieved its annual financial guidance for 20 consecutive years.
The Canadian pipeline and utility operator generated 12.5 billion Canadian dollars ($9 billion) of distributable cash flow last year. It pays out between 60% to 70% of its stable cash flow in dividends (5.2% current yield), retaining the rest to reinvest in its growth.
Enbridge currently has a multi-billion-dollar backlog of commercially secured expansion projects underway that should enter service through the early 2030s. The company expects to grow its cash flow per share at around a 5% annual rate after this year. That should support continued dividend growth. Enbridge has increased its dividend for 31 consecutive years (in Canadian dollars).
Kinder Morgan
Kinder Morgan (NYSE: KMI) operates the largest natural gas transportation system in North America. It's also a leader in transporting refined products and carbon dioxide. These assets generate very predictable cash flows (96% is either take-or-pay, fee-based, or hedged).
The gas pipeline giant expects to generate nearly $6.4 billion in cash flow from operations this year. Kinder Morgan plans to pay nearly $2.7 billion in dividends, while retaining the rest to reinvest in growing its pipeline operations.
Kinder Morgan currently has $10 billion in growth capital projects underway, which it expects to finish through 2030. Meanwhile, it's pursuing more than $10 billion of additional projects. These expansions should grow its cash flow, giving Kinder Morgan more fuel to increase its high-yielding dividend (3.5% current yield). This year will be the ninth year in a row that Kinder Morgan has raised its dividend.
Printing cash, no matter what happens with energy prices
Pipeline companies generate very durable cash flows because long-term contracts and government-regulated rate structures underpin the bulk of their assets. As a result, they'll continue to quietly print cash long after the war-fueled boost in oil prices ends. That makes them ideal energy stocks to buy and hold long-term, especially for investors seeking income.
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Matt DiLallo has positions in Enbridge, Energy Transfer, and Kinder Morgan. The Motley Fool has positions in and recommends Enbridge and Kinder Morgan. The Motley Fool has a disclosure policy.
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