Elliott Gue is recognized as a long-standing investment expert in the energy field; here, the editor of Energy and Income Advisor reviews some favorite buy-rated ideas among midstream players.
Energy Transfer LP (ET), an increasingly diversified but still focused midstream company, has seen its shares return 26 percent so far this year. Management boosted its dividend by 0.8 percent sequentially from August payment. The payout is up 17.9 percent over last 12 months, though going forward boosts are likely to remain in line with newly stated dividend growth rate of 3 to 5 percent annually with quarterly bumps.
With Energy Transfer’s acquisition of Crestwood Equity Partners now closed, management raised its guidance range for 2023 EBITDA to a new mid-point of $13.55 billion, up from the previous $13.3 billion.
Energy Transfer’s pre-merger NGL fractionation volumes increased by 9 percent in Q3 from year ago levels, as the company brought more assets into service and realized the benefit of previous M&A. NGL transportation volumes rose by 14 percent and NGL exports were higher by 20 percent, both all-time company records.
We believe it won’t be long before Energy Transfer announces another accretive deal in the still widely fractionated US midstream sector. And each deal makes it capable of doing bigger and better M&A. Buy up to $15.
Enterprise Products Partners (EPD), a midstream blue chip, has returned 18.5 percent year to date so far. Q3 results were predictably solid, with distributable cash flow coverage of the dividend at 1.7 times. Q3 DCF increased by 0.5 percent while EBITDA rose by 3.1 percent.
But underneath, the numbers were far stronger with volumes of NGLs and other liquids increasing 10.4 percent. Natural gas pipeline volumes improved by 5.1 percent, NGL fractionation rose 7.1 percent and Propylene grew by 2 percent.
As for the balance sheet, Q3 debt interest cost increased by a modest 6.2 percent from a year ago, as Enterprise funded expansion with operating cash flow and utilized only minimal floating rate debt.
Free cash flow again comfortably covered dividends, with surplus to accelerate debt retirement. That was despite increased CAPEX to take advantage of “more opportunity,” as the company added $3.1 billion in new Permian Basin growth projects in late October. Buy up to $33.
TC Energy Corp. (TRP), a Canada-based North American midstream giant, is in the midst of a strategic restructuring, including a planned spinoff of oil pipelines into a separate company next year.
The best news from Q3 results was management’s announcement that the Coastal GasLink pipeline is now “mechanically complete,” ahead of its year-end target.” The planned spinoff of the liquids pipelines is also on track, with the Keystone pipeline system the primary asset.
The company also affirmed its guidance for 3-5 percent annual dividend increases through 2026, That’s backed by annual EBITDA increases of 5 to 7 percent fueled by yearly capital spending of CAD6 to CAD7 billion. Q3 comparable earnings per share slid by 6.5% from the year ago quarter. But the numbers underneath were solid, with Q3 US natural gas pipeline throughput improving 1.4 percent to new record.
TC shares are arguably assigning close to zero value for the liquids pipeline spinoff. That business, however, continues to generate reliable, long-term contracted cash flows that should afford a sizable dividend. And it should quickly be a takeover target, even if political prospects for Keystone expansion in the US don’t improve. TC is a value up to $50.