Easily one of the most challenging aspects of the post-pandemic new normal centers on hydrocarbon energy price spikes. At the pump, hardly any mitigation options exist. However, investors can choose to acquire shares of energy firms, particularly the exciting upstream players (exploration and production). Still, the astute market participant ought to go infrastructural with two compelling midstream energy stocks to buy — KMI and ENB.
Throughout this year, the broader hydrocarbon space encountered several sector-shifting dynamics. First, the unprecedented expansion of the money supply due to the Federal Reserve’s monetary stimulus programs inherently sparked an inflation crisis. To address this dilemma, the Fed pivoted to a hawkish strategy, effectively aiming to constrain the money supply. Should the central bank succeed in controlling inflation, the end result would theoretically be negative for the energy sector.
However, geopolitical circumstances got in the way of the Fed, adding nuances to the framework. Recently, the Organization of the Petroleum Exporting Countries and its non-member allies (a cartel known as OPEC+) agreed to cut production by 2 million barrels per day. As a result, the narrative for the hydrocarbon sector (including midstream energy stocks) rebounded.
If hydrocarbon prices continue to rise, shifting portfolio exposure to popular oil plays would make sense. While not taking anything away from this thesis, investors ought to consider including midstream energy stocks in the mix.
For one thing, midstream companies – which involve infrastructural businesses such as storage and transportation – represent a vital cog. The midstream component links the upstream segment with the downstream business (refining and marketing). Therefore, it’s an indispensable subsector.
In addition, midstream energy stocks benefit from inelastic demand at the baseline of consumption. No matter what happens in the economy, society needs energy storage and transportation solutions. Therefore, investors can sleep a little easier at night betting on this segment.
Kinder Morgan (NYSE:KMI)
One of the largest midstream energy stocks in North America, Kinder Morgan specializes in owning and controlling oil and gas pipelines and terminals. Per its corporate profile, Kinder Morgan owns an interest in or operates approximately 83,000 miles of pipelines and 143 terminals.
First, KMI attracts as one of the most compelling midstream energy stocks because of its dividends. Currently, the company offers a forward yield of 6.5%. Also, the company features five years of consecutive dividend increases. To be fair, its payout ratio is very high at 90.2%, though with increasing demand for energy – particularly from the return-to-the-office transition – Kinder may be better positioned than what it looks like on paper right now.
In addition, the company enjoys a relatively well-balanced financial profile. For instance, the company features a decent sales trajectory, including a three-year revenue growth rate of 4.7% and a three-year free cash flow (FCF) growth rate of 26.5%. Both metrics rank at least above 65% of Kinder’s rivals.
On the profitability side, the midstream specialist has a net margin of nearly 14%. This ranks higher than over 68% of the industry. As well, Kinder features 10 years of consecutive profitability, thus demonstrating resilience.
Is KMI Stock a Buy, According to Analysts?
Turning to Wall Street, KMI stock has a Hold consensus rating based on two Buys, five Holds, and zero Sell ratings. The average KMI price target is $20.57, implying 20.15% upside potential.
Enbridge (NYSE:ENB)
For investors that want to dial up the risk factor for possibly greater rewards among midstream energy stocks to buy, Enbridge may provide the opportunity. Enbridge owns and operates pipelines throughout Canada and the U.S. Per its corporate profile, Enbridge’s pipeline system is the longest in North America.
On the passive income front, ENB facilitates more generosity than Kinder Morgan, with a forward yield of 6.7%. With historically-high inflation torturing portfolios this year, its high yield will undoubtedly attract some market participants. However, it does come with one major caveat. With a payout ratio of nearly 115%, questions exist surrounding its sustainability.
Admittedly, it’s a distraction. However, it’s also important to remember that the demand paradigm may be shifting. Therefore, it’s not impossible for Enbridge to sustain this dividend, depending on future market conditions.
Financially, the midstream player is a solid business. Frankly, the company could use some shoring up of its balance sheet. However, it features decent profitability metrics, including a net margin of 10.2% that ranks better than over 63% of the competition.
Is ENB Stock a Buy, According to Analysts?
Turning to Wall Street, ENB stock has a Moderate Buy consensus rating based on seven Buys, five Holds, and zero Sell ratings. The average ENB price target is $43.31, implying 16.5% upside potential.
Conclusion: Midstream Energy Stocks Provide Diversification
Generally speaking, the hydrocarbon firms that specialize in or feature upstream business models tend to enjoy significant attention. However, the infrastructural component inherent in midstream energy stocks – while perhaps more boring – offer fundamental stability. After all, whether there’s high demand or not, critical resources must be stored somewhere.
