When it comes to investing in energy companies, concerns regarding volatility in oil and natural gas prices haunt investor. Certainly, there are strategies that can help investors sail through choppy energy market conditions. In fact, there are several stocks in the energy space that not only have low commodity-price exposure but also generate handsome distribution yields.
Volatile Commodity Prices
The price of West Texas Intermediate crude, trading at more than $74 per barrel mark, has improved drastically from the pandemic-hit April last year, when oil was in the negative territory. With coronavirus vaccines being rolled out at a massive scale, the demand for fuel will possibly improve further.
It is the same story with natural gas as its price has improved roughly 128% since last March when gas hit a low. Despite the massive recovery, long-term historical price charts of oil and gas have historically been volatile, with a number of other factors weighing in.
In fact, the stability in the recent surge in commodity prices is dependent on how quickly countries vaccinate people and vaccines’ efficacies against the deadly variants of coronavirus. Hence, widespread uncertainties justify volatility in oil and gas prices.
Sailing Through the Volatility
Given that the energy market is choppy, it is possible to sail through volatilities while investing in midstream players. This is because, unlike exploration and production operations that rely primarily on oil and gas prices, midstream business is relatively more stable. Pipeline and storage assets are mostly being reserved by shippers for long term, thereby generating stable fee-based revenues for midstream players.
Backed by minimal volume risks and low direct exposure to oil and oil and gas price volatility, midstream businesses are poised to generate steady cashflow and quarterly distributions.
3 Stocks in the Spotlight
Employing our proprietary
stock screener, we have zeroed down on three midstream stocks, two of which carry a Zacks Rank #2 (Buy), while one sports a Zacks Rank #1 (Strong Buy). Each of the midstream player generates handsome distribution yields, outpacing the broader energy sector. You can see the complete list of today’s Zacks #1 Rank stocks here . Energy Transfer LP ( ET Quick Quote ET - Free Report) has a huge network of midstream properties that comprise intrastate and interstate natural gas transportation and storage assets. The partnership’s midstream business includes transportation and terminalling assets for crude oil, natural gas liquids (NGL) and refined product. The interstate pipelines of the partnership, which spread over roughly 19,000 miles, have a throughput capacity of 21 billion cubic feet per day (Bcf/D). Energy Transfer boasted that 95% of its revenues, which are derived from interstate pipelines, are based on fixed reservation fees. This signifies the stability in business and ensures handsome future distributions. Currently, the partnership’s distribution yield is 5.8%, higher than the energy sector’s 3.6%. In fact, in the past year, the #2 Ranked stock’s distribution yield has consistently been higher than the energy sector. Distribution Yield: ET Image Source: Zacks Investment Research Magellan Midstream Partners LP ( MMP Quick Quote MMP - Free Report) has a strong midstream presence with assets transporting, storing and distributing refined petroleum products and crude oil. The partnership’s business model is relatively stable since it is focused mostly on fee-based and low-risk activities. This secures Magellan Midstream’s future distributions. In fact, through various business cycles, the Zacks #2 Ranked stock has been steadily paying distributions since its IPO on 2001. Currently, the partnership’s distribution yield is 8.6%. Distribution Yield: MMP Image Source: Zacks Investment Research Plains GP Holdings LP ( PAGP Quick Quote PAGP - Free Report) has an indirect, non-economic controlling general partner interest in Plains All American Pipeline LP ( PAA Quick Quote PAA - Free Report) – a leading midstream player with a huge network of pipeline, terminalling, storage and gathering properties with strong presence in prolific oil and NGL producing basins. With an indirect limited partner interest in Plains All American Pipeline, Plains GP Holdings generates stable distributions for its unit holders. Currently, the distribution yield of Plains GP Holdings, with Zacks Rank of 1, is 6.4%. Distribution Yield: PAGP Image Source: Zacks Investment Research