2 Energy Stocks You Can Buy on Sale Today

Wall Street generally paints with a broad brush, often lumping too many companies into one larger trend. For example, oil and natural gas prices have rebounded strongly from their lows in 2020, pushing energy stocks higher. And yet some energy stocks, notably those in the midstream niche, have, to some degree, been left behind. Here’s why Magellan Midstream Partners (MMP -0.77%) and Kinder Morgan (KMI -1.40%) might still be on sale today despite the energy rebound.

1. All-in on carbon

Magellan Midstream is a master limited partnership (MLP) that owns pipelines, storage, and refining assets that serve the oil (28% of operating margin) and refined products (72%) spaces. The stock is down roughly 30% from its highs in 2018 even though it has risen sharply from its lows in 2020. And yet, given its focus on things like oil, gasoline, and diesel, you might expect it to move in similar ways to the oil giants. The difference is that Magellan charges fees for the use of its assets, so it doesn’t really benefit from rising prices. Demand for energy is the big issue and ESG investors are still pushing the anti-carbon fuel angle pretty hard.

Over the very long term, reduced demand for carbon fuels is highly likely. But in the near term there’s no easy way to replace the products that Magellan helps move to market. So, demand for its services is likely to remain solid. Meanwhile, intrepid investors willing to go against that grain can collect a fat 8% distribution yield. Notably, the MLP covers its payout with cash flow by roughly 1.2 times, which provides ample leeway for adversity. Notably, when demand for energy fell in 2020, Magellan stood by its distribution and, when things got better again, hiked it in 2021.

On top of that, Magellan has a fairly strong balance sheet. The MLP’s ratio of debt to earnings before interest, taxes, depreciation, and amortization (EBITDA) is a solid 4 times, roughly in line with some of the best-run names in the midstream space. If you are looking for a big yield in the energy patch, this still down-and-out name should be enticing.

2. A grain of salt

Kinder Morgan cut its dividend in 2016 after telling investors to expect a dividend increase. After getting back on the dividend growth track, it hiked less than it promised in 2020. These dividend moves bring up the issue of trust and are good reasons for conservative investors to avoid this midstream giant. But the key factor in both cases was the market environment, which was difficult in both 2016 and in 2020. Thus, these decisions were probably in the best interest of the company, even if they might have upset dividend investors.

Today, Kinder Morgan has strung together five years of dividend increases, if you include 2022. And it has a business that’s increasingly focused on natural gas midstream assets (62% of earnings before depreciation and amortization), which should benefit from this fuel’s use as a transition energy source. But the big story is that, like Magellan, demand is the driving force behind Kinder Morgan’s largely fee-based business. And demand is not going away anytime soon. 

In fact, management recently increased its full-year 2022 guidance on strong volumes and favorable contract renewals. Longer term, Kinder Morgan thinks demand for oil and natural gas will keep rising until at least 2040, even as demand for renewable energy rises in an all-of-the-above global energy strategy. That suggests years of solid results ahead for this stock, which is down 15% from its high-water mark in 2020, and its nearly 6% dividend yield.

Nuances in the energy patch

If you are looking for deals in the energy patch, the big oil producers probably won’t fit the bill for you. However, shift gears a little and look at the midstream niche, and suddenly you can find some attractive deals. High-yield Magellan and Kinder Morgan both remain on sale, even though they have rebounded some from their worst levels of 2020. 

Reuben Gregg Brewer has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Kinder Morgan. The Motley Fool recommends Magellan Midstream Partners. The Motley Fool has a disclosure policy.

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