Top Three Midstream Stocks to Consider Purchasing as 2024 Approaches its Conclusion
Midstream firms are vital to the energy sector. They gather, refine, transport, store, and export crude oil, natural gas, and related goods. These organizations receive fees for offering midstream services to other companies in the energy industry. This steady income allows them to distribute substantial dividends while investing in expanding their midstream operations.
The midstream sector is experiencing a successful year, partly due to the expectation of enhanced growth in the coming years as AI data centers drive up electricity demand. Several pipeline stocks are still promising investments as we move into the new year.
As we conclude 2024, Enbridge (ENB 0.26%), MPLX (MPLX -0.25%), and Enterprise Products Partners (EPD 0.25%) stand out to some analysts on Fool.com as excellent selections to purchase, offering appealing income streams and growth prospects.
Enbridge serves as a connector
Reuben Gregg Brewer (Enbridge): One objective of Enbridge is to meet the world's energy requirements. Currently, around 75% of earnings before interest, taxes, depreciation, and amortization (EBITDA) comes from oil and natural gas pipelines. This fundamental energy infrastructure provides reliable fee income over time due to the critical role of fossil fuels within the global economy.
However, around 22% of EBITDA originates from regulated natural gas utilities, which has increased from 12% a few years ago due to the acquisition of three utilities from Dominion Energy. This acquisition decreased oil pipeline exposure and increased overall natural gas exposure from 40% of EBITDA to 47%.
As the world migrates towards cleaner energy sources, natural gas is serving as a transitional fuel because it is cleaner than oil. The utility acquisition lowered oil exposure and raised overall natural gas exposure. Enbridge is living up to its mission of fulfilling the world's energy requirements.
This last 3% of EBITDA comes from renewable power assets. In the long run, this is where the world will be meeting its power needs. However, there is still a lengthy journey to go before clean energy replaces fossil fuels, so look for Enbridge to keep expanding this segment as it evolves along with the world.
The really exciting aspect is that you can purchase this purposeful and transitioning energy business and collect a substantial 6.2% yield. Notably, the dividend has increased yearly for 30 consecutive years (in Canadian dollars). There is much to appreciate here for income investors seeking a clean energy hedge.
A potent income stream
Matt DiLallo (MPLX): MPLX offers investors a sizable income stream. The master limited partnership (MLP) returns almost 8%. This is significantly higher than the S&P 500's dividend yield (1.2%).
This generous yield is just one aspect. MPLX is also seeing strong growth. It has grown its distributable cash flow at a 7.7% compound annual rate since 2020, which has aided its increase in distribution at a 10.7% compound annual rate since 2021. It has provided investors a more than 10% raise in each of the last three years, including 12.5% in late October.
MPLX expects to complete an expansion of its BANGL joint venture pipeline early next year. Additionally, MPLX and its partners are building the Blackcomb and Rio Bravo pipelines, which should enter commercial service in the second half of 2026. MPLX also has more natural gas processing plants scheduled to enter commercial service over the next couple of years.
The MLP possesses sufficient financial flexibility to fund these expansion projects while maintaining its sizeable distribution. During the third quarter, it generated enough cash to cover its payout by a comfortable 1.5 times. Meanwhile, it has a low 3.4 leverage ratio. This provides it with ample financial flexibility to approve additional expansion projects or make attractive acquisitions. It acquired an additional stake in BANGL and bought out some existing joint ventures and a dry gas gathering system earlier this year.
Given its financial flexibility and growth visibility, MPLX should be able to continue increasing its distribution in 2025. As we approach the new year, this makes it a superb midstream stock to buy for income and growth for those comfortable with investing in an MLP that transmits a Schedule K-1 federal tax form each year.
The business boasts an impressive financial scorecard, scoring an 'A-' from at least two evaluators. It ended the third quarter with a liquidity reserve of $5.6 billion, including readily available funds and revolving credit lines. The company's distributable cash flow (DCF) saw a 5% increase in Q3, leading its directors to boost the dividend by the same percentage.
Enterprise Products has a commendable history of producing sufficient cash flows to sustain its escalating dividends. Since 2018, it has reliably kept its DCF — the cash left for investors after essential capital expenditures — over 1.5 times its dividend.
Enterprise Products has ongoing projects totalling approximately $6.9 billion in the pipeline. A few of these, including the Bahia pipeline and facilities in the Delaware and Midland basins, are slated for completion in 2025. These projects are anticipated to boost Enterprise Products' cash flows and enable larger dividends, making it a compelling midstream energy stock buy as 2024 winds down.
Given the success in the midstream sector, some analysts recommend purchasing pipeline stocks like Enbridge, MPLX, and Enterprise Products Partners as they offer attractive income streams and growth prospects. These companies are investing their steady income, in part from midstream services in the energy industry, to expand their operations. For instance, Enbridge is expanding its renewable power assets, while Enterprise Products has ongoing projects worth over $6.9 billion.
