Before the energy sector bear market that started in late 2014, which still lingers in the minds of investors, most energy midstream companies increased their dividends every single quarter. The crash in energy commodity prices and stock valuations forced many Boards of Directors to rethink their balance sheet practices and dividend policies. The number of energy midstream stocks that continue to increase their dividends every quarter has dwindled, but a handful remain.
Energy midstream, sometimes called energy infrastructures, are the companies that own energy commodity gathering, pipeline, storage, and terminal assets. These companies have contracted, fixed-fee revenue streams that are a lot more stable than the results from the upstream oil and gas producers or the downstream processing and refining companies. The steady revenue streams have allowed the midstream companies also to be stable dividend payers. Some stocks in the group have many years of dividend growth history.
The energy sector crash had a strong negative effect on growth plans in the midstream sector. With share prices down and yields up, companies were no longer able to effectively use equity issuance as currency to pay for growth projects.
Back in the good old days, a midstream company would finance a new project with a combination of equity and debt. The free cash flow generated by the midstream assets were almost entirely paid out as distributions to investors.
That party stopped with the sector crash, and now midstream companies retain more of their free cash flow to help pay for growth projects. In the early days of this decade, cash flow coverage (distributable cash flow or DCF) of 1.05 times was considered adequate and the norm. Now, the quality midstream companies have much higher DCF coverage of the dividends they pay.
A quick note before we get to the three midstream stocks to consider… Also, prior to 2016, most energy midstream companies were organized as master limited partnerships (MLPs), and investors received IRS Schedules K-1 for tax reporting. After a half-decade of restructuring, now less than half of the midstream companies continue as K-1 reporting MLPs.
Here are three energy midstream companies that have just announced dividend increases and should continue to boost their payouts every quarter for many years to come.
Phillips 66 Partners LP (PSXP) is an MLP that primarily provides midstream services to its sponsor, refining company Phillips 66 (PSX).
PSXP owns and operates crude oil gathering systems, crude oil pipelines, refined product pipelines, storage systems, and crude oil rail terminals.
The company describes itself as a growth-focused MLP, with the goal of growing distribution to investors. The quarterly payout has been increased every quarter since PSXP’s mid-2013 IPO.
The distribution was just increased by 1.2%, which provides 9% dividend growth over the last year. Expect high single-digit growth going forward. The shares currently yield 6.3%.
Magellan Midstream Partners LP (MMP) is an independent (no corporate sponsor or general partner) MLP. Magellan has 9,700-mile refined products pipeline system with 53 connected terminals as well as 25 independent terminals not connected to the pipeline system and 1,100-mile ammonia pipeline system.
In addition, the company owns approximately 2,200 miles of crude oil pipelines and storage facilities with an aggregate storage capacity of about 33 million barrels. Storage across the network total more than 100 million barrels.
The MMP distribution has been increased since the company was launched in early 2001. The most recent increase to be paid in November was the 70th consecutive increase.
In recent years, the payout has grown by an annual compounding high single-digit rate. MMP currently yields 6.4%.
Oneok, Inc. (OKE) operates natural gas liquids (NGLs) systems. The network connects NGL supply in the Mid-Continent, Permian, and Rocky Mountain regions with key market centers and an extensive network of natural gas gathering, processing, storage and transportation assets.
Oneok is structured as a corporation. In 2017 the company absorbed the MLP it controlled.
The OKE dividend has been increased every quarter since that merger in mid-2017.
The just-announced dividend to be paid in November was up 2.8% from the previous payout. OKE yields 5.1%.Do you feel you're ready for retirement?
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