The midstream energy sector has consistently attracted investors seeking stocks with substantial yields and increasing payouts. These companies mainly function as energy toll operators, generating clear cash flow streams that support solid distributions.
However, many investors may be unaware that the sector has experienced significant transformation over the last decade, enhancing the appeal of midstream stocks. The industry has improved its balance sheets by decreasing leverage, transitioning to fee-based contracts, raising distribution coverage ratios, and eliminating cumbersome incentive distribution rights (IDRs), which acted like a tax during payout increases.
Simultaneously, energy producers have adopted a more disciplined approach, focusing on cash flow generation rather than merely increasing production.
Moreover, midstream master limited partnerships (MLPs) are currently trading at significantly lower valuations compared to a decade ago, when they operated with higher leverage, lower coverage ratios, and IDRs. Between 2011 and 2016, the average MLP had an enterprise value-to-EBITDA (earnings before interest, taxes, depreciation, and amortization) multiple of 13.7 times, while today, premium MLPs can be purchased for around 11 times or less. Many also have promising growth potential due to increased energy demand from the development of artificial intelligence (AI).
Now, let’s explore three excellent MLPs boasting high yields and expanding distributions that are worth considering for investment right now.
Energy Transfer: A High-Yield Growth Bargain
Energy Transfer (ET +0.05%) is potentially one of the best deals in the stock market across all sectors. It trades at a forward EV/EBITDA multiple of just over 8.5 times, supported by strong growth potential. With a yield of 7%, the company aims to increase its distribution by 3% to 5% annually.
Enterprise Products Partners: A Steady Performer
Enterprise Products Partners (EPD 1.34%) trades at a forward EV/EBITDA multiple slightly above 11 times. Despite being on the pricier side, this stock has historically commanded a premium due to its reliability, exemplified by 27 consecutive years of distribution increases. Currently yielding 5.7%, it has shown consistent yearly growth of about 3%.
MPLX: A High-Yielding Stock with Promising Payout Growth
If high yield and rapid distribution growth are your priorities, look to MPLX (MPLX +0.84%). This stock boasts a yield of 7.8% and has ramped up its distribution by 12.5% over the last two years, with plans for similar increases in the next two years. The stock is attractively valued with an EV/EBITDA multiple of below 11 times.
In conclusion, the midstream energy sector has evolved into an appealing investment avenue, with several MLPs offering strong yields paired with growth potential, ensuring they remain attractive long-term options.
