Invest in Astute High-Return Energy Shares Worth $1,000 at This Instant
In the hunt for high-yield dividend stocks, the midstream energy space is a goldmine. Many of these companies, structured as master limited partnerships (MLPs), such as Energy Transfer and Enterprise Products Partners, provide generous distributions that often resemble dividends but may also include a return of capital portion. This portion lowers the tax liability when you sell the stock, a beneficial yet tax-time paperwork-adding feature.
The midstream sector has seen significant changes over the past decade. Previously, a general partner (GP) and limited partner (LP) structure was common. The GP, by holding incentive distribution rights (IDRs), greatly benefited from the splitting of distributions when MLPs hit a 50/50 high split, while the LP was responsible for paying GP a percentage of distributions at certain points. This structure led to increased funding through equity issuance as the LP's share size grew, consequently boosting GP's payments.
Fortunately, this structure has become obsolete, and today's MLPs are generally in better financial standing, carrying less debt and expanding their business through internal resources (free cash flow). Surprisingly, despite industry improvement, MLPs currently trade at lower valuations compared to the past when the model was less appealing to investors. The combination of lower valuations and a thriving industry has created an excellent opportunity for investors.
Let's delve into two MLPs you should consider for investment: Energy Transfer and Enterprise Products Partners.
Energy Transfer
Energy Transfer is an exceptional MLP with a remarkable set of assets, ranked highly within the midstream space. Despite this, its stock trades cheaply at a forward EV/EBITDA multiple of 8.5. With an enticing forward yield of 6.4%, and a predicted annual distribution growth of 3% to 5%, Energy Transfer presents an enticing value proposition. Its generous distribution is well-covered, with a coverage ratio standing at 1.8 times last quarter, based on distributable cash flow.
Energy Transfer's strong presence in the Permian Basin gives it access to affordable domestic gas. This area is predominantly oil-drilled, but capacity constraints for transporting associated gas create cheap regional pricing, making Texas an ideal location for data center development. The company reported inbound requests for more than 40 proposed data centers in 10 states, along with potential connections to 45 power plants across 11 states. Energy Transfer announced a $2.7 billion Permian gas takeaway project, intended to support Texas's data center growth.
Enterprise Products Partners
Enterprise Products Partners has always been a top-tier company in the MLP space, especially when it comes to taking care of its shareholders. It eliminated its IDRs in 2002 and again in 2011, opting for a more conservative approach to leverage and maintaining a solid balance sheet. This long-standing dedication to shareholders has enabled the company to boost its distribution by 26 consecutive years, remaining undeterred by various economic and energy cycles. Its stock offers a substantial yield of 6.4% and is trading at a fair EV/EBITDA multiple of 10.
Enterprise Products Partners is set to boost its growth due to the increasing requirements for power in the AI and data center sectors. After cutting its growth capital expenditures (capex) to $1.6 billion in 2022, the company plans to invest $3.5 billion to $4 billion in 2024. It has consistently delivered a 12% annual return on its growth capex, laying the foundation for strong EBITDA growth in the coming years.
The company's strategic positioning in Texas, particularly around Dallas and San Antonio, places it at the heart of the area's expansion into a major AI and data center hub. AI's growing power requirements are viewed as a promising signal for the natural gas sector, and Enterprise Products Partners possesses the prime assets to capitalize on this trend.
Additionally, the structural changes in the MLP industry have led to more financially stable companies, reducing their debt levels and relying on internal resources for expansion. This has made investing in MLPs like Energy Transfer and Enterprise Products Partners an attractive opportunity, especially considering their lower valuations compared to the past.
Investors looking to diversify their portfolio and capitalize on the thriving midstream energy sector might find value in Energy Transfer and Enterprise Products Partners. Both companies have shown a strong commitment to their shareholders through generous distributions and strategies aimed at maximizing returns, making them solid choices for money invested in the finance sector.
