If you’re considering investing $2,000 at present, it would be wise to explore midstream energy stocks. These investments often provide steady, income-generating cash flows due to their fee-based nature, boast high dividend yields, and present promising growth prospects. Interestingly, the sector is currently undervalued compared to a decade ago, even though the companies are in stronger financial positions.
Let’s look at three smart midstream investment options to buy right now.
Energy Transfer
In my opinion, I find Energy Transfer (ET) to be one of the most attractive investment options currently available on the market due to its appealing risk-reward ratio. This is why a significant portion of my personal investments is allocated towards it. It offers a high dividend return, an enhancing financial outlook, and promising growth prospects. Remarkably, despite these strengths, it is traded at one of the lowest valuations within its sector.
Over the past few years, the company has focused on strengthening its financial position by enhancing its balance sheet. Now, it’s poised to resume growth, having made necessary adjustments like reducing its distribution in 2020 to manage debt. Since then, it has utilized excess cash flow for growth and deleveraging purposes. Currently, its leverage is within the lower limits of its designated range, a testament to the robustness of its balance sheet as stated by management. This financial strength offers flexibility as the company embarks on growth once more, unlike during its previous major investment period.
Simultaneously, about 90% of its earnings, excluding interest, taxes, depreciation, and amortization, are derived from fees, with most contracts designed as take-or-pay. This results in a consistent income stream that is primarily unaffected by commodity prices. In the last quarter, its cash flow available for distribution (operating cash flow minus necessary capital investments) surpassed its distribution requirements more than twice over, allowing for further increases. The management has increased the distribution for 14 consecutive quarters, returning it above previous levels, and aims for a yearly growth of 3% to 5% in the future.
I’m thrilled to share that Energy Transfer is on the rise again! We’ve got a staggering $5 billion in growth projects lined up for this year, compared to $3 billion last year. This surge includes initiatives focusing on supplying natural gas to cutting-edge AI data centers and boosting liquified natural gas (LNG) exports – two trends that are only starting to pick up steam!
In contrast to its robust financial position, the stock maintains a relatively low forward enterprise value-to-EBITDA ratio of 8, which is typical for midstream stocks. Given its solid financial health, high dividend yield of 7.5%, and promising growth prospects, this stock seems undervalued. Consequently, it’s an ideal pick for long-term investment portfolios.
Enterprise Products Partners
Enterprise Products Partners (EPD) is a business that could form the core of your investment portfolio. In my experience, I’ve held onto this stock for a considerable duration. It boasts a robust history of distribution growth, operates in profitable sectors, and maintains a cautious financial structure. It might not experience a rapid doubling in value within a year, but it offers the potential for a consistent, increasing income flow over an extended period.
For 26 consecutive years, this company has expanded its distribution, currently yielding approximately 6.9%. It bumped up its dividend by almost 4% during the last quarter and I anticipate it will raise it by a similar percentage in future quarters as well. This consistent growth, over time, significantly multiplies the returns.
The company’s operations are designed for continuity as well. Typically, about 85% of its income is derived from contractual fees, most of which have take-or-pay conditions and annual price adjustments tied to inflation. This structure ensures a stable cash flow even in unpredictable energy market conditions.
Amongst Enterprise’s key strengths lies its significant involvement in Natural Gas Liquids (NGLs), making it one of the leading integrated entities nationwide. Its operations span the entire spectrum, encompassing collection, processing, and exportation. The worldwide demand for NGLs is consistently expanding.
This company has traditionally managed its finances in a cautious manner, maintaining a debt level slightly over three times its equity. Its expenses are comfortably covered more than 1.7 times, ensuring a strong distribution. The company primarily funds its growth internally, reducing the need to constantly seek funding from capital markets for each project.
For long-term investors, Enterprise is a “sleep-well-at-night” stock.
Genesis Energy
As an observer, I find myself intrigued by Genesis Energy (GEL), which doesn’t boast the extensive integrated midstream networks or the illustrious track records of giants like Energy Transfer and Enterprise. However, it’s currently undergoing a strategic metamorphosis that hints at untapped value. For those investors with an appetite for a bit more risk, Genesis offers promising potential upside. In fact, its aura reminds me of my most successful midstream investment to date – Crestwood (now absorbed by Energy Transfer).
The significant step taken by the company was selling its soda ash business, which generated a revenue of $1.4 billion. Immediately after, UBS observed that this money was utilized for debt management, specifically retiring expensive debts and preferred shares. UBS anticipates that this decision will result in an annual savings of $84 million on interest expenses and preferred dividends, potentially enhancing the company’s cash flow substantially.
From now on, the main concern for the company lies with its overseas oil and gas infrastructure, specifically its pipeline assets. Notably, two significant deepwater projects located in the Gulf of Mexico, which are linked to their offshore pipeline network, are about to start production. Combined, these projects could potentially generate an additional $150 million in yearly operational income for the company.
As I gleefully observe, our maritime shipping enterprise is poised to break all-time revenue records this year, a testament to its robust performance! Meanwhile, our offshore operations, which temporarily suffered setbacks due to mechanical hiccups, are steadily bouncing back. This promising scenario sets Genesis up for significantly increased cash flow in the future – a development that fills me with unbridled excitement!
Currently, the stock’s return (yield) is approximately 3.9%. However, as new projects are launched and become more active, Genesis might have the opportunity to significantly increase its distribution in the future.
While it might not be the most secure mid-year stock investment you could make, it could potentially offer one of the greatest returns, given its impressive performance throughout the year.
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2025-07-20 10:14