Midstream Income – A Triple Game in Energy

High-yield common stocks of utility companies have become more difficult in recent years as share prices have risen. And a number of companies are now focused on buying back their own shares rather than raising dividends, notes Roger Conrad, editor of Conrad’s Utility Investor.

My main rule is that high dividends don’t last long unless they’re backed by a healthy, growing company. And the best proof of that is a quality rating of “A” or worst case “B” along with a constantly growing payout.

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My favorites that meet these qualifiers are a trio of energy midstream companies that are currently in our model portfolio that trade well below my highest recommended entry points: Kinder Morgan Inc. (RMI), Pembina Pipeline (PBA) and TC Energy (TRP).

These stocks have been lagging long enough for more than a few investors to give them up completely. But ironically, the burden of proof is increasingly on the bears as to why these companies continue to earn such deeply discounted valuations.

All three reported free cash flow after CAPEX and dividends at what is arguably a low in the system volume energy cycle. And management has used that surplus to make their balance sheets the strongest in years.

As a result, there is basically no risk of dividend cuts, even though returns are historically high compared to other income investments. And all three are likely to increase payouts over the next 12 months.

The bear case is that cash flows will dry up and asset values ​​will decline as the world turns away from fossil fuels, and in the meantime, ESG-focused investors will dump their stocks.

However, the world still lacks affordable alternatives to oil and gas, which arguably have not yet reached peak demand. And the cycle that drives prices is now shifting, as several years of record-low investment exacerbate supply scarcity, even as demand recovers from the pandemic.

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That at least argues for at least one more major oil and gas stock that even ESG-minded will have to find ways to get involved in. And these increasingly cash-flush companies still have decades to transition their systems to carbon-free alternatives, including renewable natural gas extracted from farms, fossil fuel-based blue hydrogen, green hydrogen and even the elusive holy grail of economics. carbon capture technology.

Since early 2020, more than 80 North American midstream companies have cut their dividends. By contrast, Kinder, Pembina and TC Energy have increased payouts and added strategic assets through a combination of acquisitions and construction.

That’s as much a test of usability as it is resilience in a tough environment like you’ll find in any industry. Kinder is a buy up to $22, Pembina under $38 and TC Energy up to $50.

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