Energy Sector Stocks: High Yields and Growth Potential Amid Market Uncertainty

Energy Transfer: Buy This 8%-Yielding Partnership On Sale Now (NYSE:ET)

The partnership offers a safe and growing 8% yield, modest DCF growth prospects, and valuation multiple upside from here. When I'm investing in businesses, I like to be sure that the overall industry has elements working in its favor. That's because it is easier for a company to grow when overall demand for its industry is rising. One of my favorite industries for the foreseeable future is midstream. The industry is set to benefit from increased investments in manufacturing due to the U.S. reshoring trend. The advent and anticipated rise of artificial intelligence is fueling increased data center demand and is another tailwind for the industry. That is because these two factors are expected to drive nationwide power demand higher by 4.7% over the next five years per Utility Dive. This would be an acceleration from the previous year's five-year forecast of 2.6% growth. That surge in electricity demand will require an all-of-the-above approach to energy, with natural gas at the forefront of powering this demand. This should lead to more of the commodity flowing through the pipelines of midstream operators in the years to come. One company that I expect to cash in on this opportunity is Energy Transfer (NYSE:ET). Accounting for 1% of my portfolio, ET is my portfolio's 39th-biggest portfolio position. The midstream operator is my third-largest midstream holding, behind ONEOK's (OKE) 2.1% weighting and Enterprise Products Partners' (EPD) 1.6% weighting. When I last covered ET with a buy rating in May, I liked that the company had growth projects set to come online soon. The company's balance sheet was improving and becoming another source of strength. ET's distribution was also growing at a healthy clip. Finally, units of the partnership were trading at an enticing valuation. Today, I'm going to be reiterating my buy rating. As was shared in its second-quarter earnings results yesterday afternoon, ET set a variety of new partnership records during the quarter. The midstream operator also upped its adjusted EBITDA guidance for 2024. In June, ET's credit rating was upgraded by Moody's to Baa2. Lastly, units still present an attractive value proposition. Each time I cover ET, it seems like déjà vu all over again. New partnership records, more projects coming online, and raised guidance. The second quarter results released on August 7th were no different. ET's total revenue surged 13.1% year-over-year to $20.7 billion during the second quarter. This topline growth was fueled by impressive growth throughout the business. For one, crude oil transportation volumes grew by 22.6% over the year-ago period to a partnership record of 6.5 million barrels per day in the second quarter. This was driven by both organic growth (8%) and the acquisitions of Lotus and Crestwood assets completed last May and November. Per Co-CEO Tom Long's opening remarks during the Q2 2024 Earnings Call, ET's total crude oil exports also rose by 11%. NGL exports increased by 3% for the second quarter to a new partnership record. Finally, NGL transportation volumes edged 4% higher during the quarter to a new partnership record. Thanks to these results, adjusted EBITDA roared 20.4% higher to nearly $3.8 billion in the second quarter. Even accounting for the 7.3% increase in the outstanding unit count, that is undeniably strong growth. ET's DCF climbed 31.2% year-over-year to top $2 billion for the quarter. The partnership upped its adjusted EBITDA guidance for 2024 from a midpoint of $15.15 billion to $15.4 billion ($15.3 billion to $15.5 billion). This wasn't just because of ET's organic results, either. In July, the company completed its $3.25 billion acquisition of WTG Midstream. That added eight gas processing plants (and two under construction) to its processing network in the Permian Basin, as well as over 6,000 miles of complementary gas processing pipelines. Nearly six months of results from this acquisition for 2024 are expected to provide a modest boost to ET's results. Beyond this year, management projects the acquisition will be accretive to DCF/unit by $0.04 in 2025 and to the tune of $0.07 in 2027. If the incremental uptick in growth from this acquisition wasn't enough, ET also has plenty of growth projects of its own under construction. The Midland Connection, adding 30 miles of pipe to connect ET's pipeline from the Permian Basin to Cushing is expected to come into service in the fourth quarter of this year. This could transport an additional 100K barrels a day of crude from ET terminals. Processing upgrades in the Permian to four plants are anticipated to come online between the fourth quarter of this year and the first quarter of 2025. That could add a total of 200 million cubic feet per day to the company's processing capacity in the region. Third, ET is increasing the capacity of the Sabina 2 Pipeline from 25,000 barrels a day to 70,000 barrels a day of natural gas between Mont Belvieu and Nederland. This is on schedule to be completed early next year. In the long term, ET has a variety of projects in the proposal stage. That includes carbon capture and sequestration projects, blue ammonia hubs in Lake Charles, Louisiana, and Nederland, Texas, and a large-scale LNG export facility at the existing Lake Charles LNG regasification terminal. Put another way, there is no shortage of projects for ET to maintain decent growth for many more years to come. Financially, the partnership is also in excellent standing. In June, ET's credit rating was upgraded by Moody's to Baa2 or BBB equivalent. That means the company now possesses BBB credit ratings from all three major rating agencies. These investment-grade credit ratings allowed ET to issue $3.5 billion of senior notes in June. Of that amount, $1 billion of notes due 2029 were issued at 5.25%. Another $1.25 billion of notes due 2034 were issued at 5.6%. The remaining $1.25 billion of notes due 2054 were issued at 6.05%. For this high-rate environment, these are arguably attractive terms for ET (unless otherwise hyperlinked or sourced, all details in this subhead were according to ET's Q2 2024 Earnings Press Release and ET's Q2 2024 Earnings Presentation). ET's 8% forward distribution yield registers at nearly double the energy sector median forward yield of 4.4%. That's sufficient for an A- grade from Seeking Alpha's Quant System for forward distribution yield. Even within the midstream industry, few peers offer comparable or higher yields. The only two major midstreams offering greater yields with which I'm familiar are MPLX LP (MPLX) and Western Midstream Partners LP (WES). From my perspective, ET's distribution is also reasonably sustainable. That's because, in the first half of 2024, the partnership generated $4.4 billion in total DCF. Against nearly $2.2 billion in distributions paid to unitholders, this was a distribution coverage ratio of 2. That means ET retained $2.2 billion in DCF to fund its growth capex and maintenance capex. Even considering the $1.4 billion in capex ($1 billion growth capex and ~$400 million maintenance capex), this left the partnership with a roughly $800 million surplus through the first half (details sourced from ET's Q2 2024 Earnings Press Release and ET's Q1 2024 Earnings Press Release). In other words, ET's business model is self-sustaining. It is paying for its distribution, building out new infrastructure, and maintaining its existing infrastructure from the DCF that it generates. This means that ET doesn't depend on capital markets via equity issuances/debt issuances to pay unitholders and fund growth (besides completing bolt-on acquisitions). That is why it didn't come as a surprise to me when ET once again upped its quarterly distribution per unit by 0.8% to $0.32. Of note, the partnership increases its distribution each quarter. So, this pace of growth remains consistent with the 3% to 5% annual distribution growth that it is targeting over the long haul. Overall, I think ET is well-positioned to keep delivering distribution growth in the years ahead. This could provide unitholders with an intriguing mix of starting income and growth potential. Since my previous article, units of ET have been flat as the S&P 500 index (SP500) has gained 1%. Contrasted to a slight uptick in my fair value estimate, this makes the midstream operator a marginally better buy now than it was three months ago. Since the return of capital provided by ET to unitholders provides the bulk of capital appreciation, I still believe the distribution discount model is a relevant valuation method. The first input for the DDM is the expected dividend per share or annualized distribution per unit in this case. That amount is now $1.28. The next input into the DDM is the cost of capital equity, which is another term for the required annual total return rate. My preference is for at least 10% annual total returns, so that is what I'll assume for this input. The final input for the DDM is the annual distribution growth rate. Erring on the side of caution, I'm reaffirming my expectation of 3.25% annual distribution growth over the long run. This is a bit less than the annual midpoint distribution growth of 4%. Using these variables for the inputs yields a fair value of $18.96 a unit. From the current $16.05 unit price (as of August 8, 2024), this represents a 15% discount to fair value. ET is a business that's thriving, which is evidenced by its new partnership records in the second quarter. That doesn't mean it is free from risks, however. One risk to ET is the potential for natural disasters like hurricanes and wildfires to damage its infrastructure. Aside from disruptions to its operations, the partnership would likely incur some out-of-pocket costs to repair these damages. If this happened on a significant enough scale, damages could reach levels beyond ET's commercial insurance coverage. That could impair the company's fundamentals. Another risk to the partnership is regulatory/legal. If ET's projects currently under construction were delayed or canceled due to activist lawsuits, this could hurt its growth prospects. A final risk is one that I highlighted in my previous article. ET's business is stable in that approximately 90% of its adjusted EBITDA is derived from fee-based contracts. This provides a relatively secure source of adjusted EBITDA for ET. The only risk to this adjusted EBITDA is that it is contingent on customers remaining going concerns. If any major and prolonged industry downturns like the 2015/2016 energy bear market happened, some customers could experience financial difficulties. That could temporarily impact ET's financial results. In my view, ET is just shy of being a strong buy right now. The fundamentals of the business point to a bright future ahead. The credit rating upgrade by Moody's was another recent positive event. ET also looks to be materially undervalued from the current unit price. Even if the partnership's valuation multiple remained flat, the 8% yield and modest future growth potential alone could deliver double-digit annual total returns. Throw in moderate valuation multiple upside, and it becomes easy to see why I remain bullish toward units of ET.

Entergy: Attractive Valuation, Earnings Growth From Data Center Deployment (NYSE:ETR)

Looking for a helping hand in the market? Members of Energy Profits in Dividends get exclusive ideas and guidance to navigate any climate. Learn More " Entergy Corporation (NYSE:ETR) is a regulated electric utility that primarily operates in the U.S. states of Texas, Louisiana, Arkansas, and Mississippi: Texas, in particular, has been making headlines quite a lot lately due to several companies relocating to the state from elsewhere. For example, we recently saw Chevron (CVX) announce that it will be moving its headquarters to Texas from California. SpaceX recently made a similar announcement. The movement of industry to the state has been attracting people to the region, who naturally want to move to where jobs are. These two trends are acting as tailwinds for Entergy's profitability. After all, the new businesses and residents need electricity, and this has been increasing the load on Entergy's network. All else being equal, this results in rising revenues and profits. I explained this in my last article on Entergy, which was published in the middle of September. The utility sector has generally performed fairly well ever since the current bull market began in November 2023. This is a very nice change from the disappointing performance that most stocks in the sector delivered during the summer of that year. As such, we might expect Entergy Corporation's stock price to have delivered a very acceptable performance since the date of our previous discussion. This assumption proves to be correct, as shares of Entergy Corporation have risen by 17.63% since my previous article on this company was published. This is much better than the 14.75% gain of the U.S. Utilities Index (IDU). Perhaps surprisingly, the company's share price has also outperformed the S&P 500 Index (SP500): It is very surprising to see a utility company's share price outperform the S&P 500 Index, as that rarely happens. After all, utilities like Entergy do not deliver particularly rapid earnings growth, and so they do not usually experience the same level of gains in a bull market as most high-growth companies. High-growth technology companies have increasingly accounted for a growing proportion of the S&P 500 Index over the years, so the performance of the market is generally dictated by those companies' stocks. In any case, every investor is almost certain to be pleased with the company's recent performance. One characteristic of utility companies is that they tend to deliver a significant proportion of their returns through the dividends that they pay out. Dividends represent a very real return that is not reflected in the share price performance of an investment. When we include the dividends that the company (as well as the indices) paid out, we get this alternative chart: This makes Entergy's performance look even better relative to the S&P 500 Index. Indeed, the inclusion of the dividends and index distributions makes the S&P 500 Index's performance look rather disappointing, as both Entergy and the utilities sector outperformed the broader market over the period by quite a bit. While this is not usually the case, it does stand as potential support for the belief that investors should not exclude any sector from their portfolio. My previous article on Entergy Corporation was published on Seeking Alpha in the middle of September 2023, so roughly eleven months have passed. Naturally, this means that a great many things could have changed that may affect our thesis. In this article, we will revisit the company and our original thesis and make updates as appropriate. As mentioned in the introduction, Entergy Corporation is a large regulated electric utility that serves the states of Mississippi, Texas, Louisiana, and Arkansas. The company is generally considered to be one of the largest utilities in the United States, as it serves approximately three million customers and has a market capitalization of $24.84 billion. However, enterprise value is generally considered to be a better measure of a company's size, so Entergy Corporation has an enterprise value of $52.57 billion today. The states in which the company operates are something of a mixture in terms of culture. Mississippi and Arkansas are both generally considered to be very rural states, as neither one of them has any particularly large cities. We can see this here: As such, the residents and businesses that the company serves in both of these states are pretty spread out, and so it can cover a very large geographic area without having a large number of customers. The same is true of much of Louisiana, as its largest city of New Orleans (Population: 383,997) is not especially large. However, Louisiana does have a number of medium-sized cities in close proximity to one another and Entergy serves nearly the entire state, so the company has a fairly large customer base there. In fact, Louisiana is home to the largest proportion of the company's customers: * Total includes both New Orleans and elsewhere. Only electric customers were counted, under the assumption that anyone who receives natural gas service also receives electric service. However, despite Louisiana and Arkansas being Entergy's largest operating states in terms of the number of customers served, Entergy typically emphasizes Louisiana and Texas in its analyst presentations and earnings press releases. One reason for this is that Texas is one of the fastest-growing states in the nation, and as such, is a driver of earnings growth for Entergy. According to World Population Review, which pulls data from official sources such as the U.S. Census Bureau, the population of Texas is currently growing at a 1.55% annual rate. This is the third-fastest growth rate in the country (after South Carolina and Florida), so we can see how the company's customer base in the state is growing. As I stated in my previous article on Entergy: The reason that this is important for Entergy is that population growth is one of the only ways that a utility can grow, and it is completely out of the utility's control. This is because Entergy is a monopoly that is restricted to operating in a specific region by law and it cannot expand by convincing customers outside of its service territory to switch providers. The fact, then, that Texas is one of the fastest-growing states in terms of population provides a tailwind to the company's growth. Texas is frequently thought of as having an oil-focused economy. After all, the hydrocarbon production growth in the Permian Basin has been one of the biggest news stories since the middle of the last decade. I certainly contributed to this surge of information on this area, as regular readers are no doubt well aware. However, Texas has also been growing as a hub for the technology sector. A few years ago, TechCrunch stated that Austin, Texas is becoming a popular place for technology start-ups: Austin made headlines in 2021 for being "the place" for startup founders and venture capitalists alike to set up shop. As Austin's skyline expands, the city continues to solidify its standing as a tech hub. And the numbers are there to back it up. VCs invested over $5.5 billion across 412 deals in 2021, more than double the amount of capital invested in 2020, according to PitchBook data. Rounds are getting larger, too, signaling a further maturing across the market: All of the top 10 deals for Austin in 2021 amounted to $100 million or more. A local newspaper in Austin, Texas also discussed the growth in the city's technology sector in an article from earlier this year. The takeaway here is that Austin, Texas is starting to have some of the same panache as cities such as Palo Alto, California, that have long attracted technology talent. Entergy Corporation does not directly serve Austin. The company's operations in the state are primarily centered around 27 counties in the Houston-Galveston region: However, parts of this service territory are fairly close to the Austin metropolitan region: Austin is in the "Capital Area" shown in the map above. Entergy's operations are mostly in the areas labeled as "Houston-Galveston Area" and "Brazos Valley" in the map above. Thus, we can see that the company might still benefit from the expansion of Austin's technology sector as it expands outward into Entergy's service territory. In addition, Entergy Corporation already serves Houston, which has been seeing substantial industrial expansion due to the oil production growth in the Permian Basin. Entergy noted the technology sector expansion as a potential growth driver in its June 2024 analyst presentation. The company included a slide showing demand forecast for U.S. data centers: This slide is not particularly descriptive, but it does show that the power consumption of American data centers is expected to grow at a very rapid pace over the remainder of this decade. The slide appears to refer to a study by the Boston Consulting Group that shows that the United States will face a shortfall of 80 gigawatts of electricity by 2030 due to the growing demands for power by technology companies constructing data centers. From the study: The commercialization of artificial intelligence and associated data center expansion is bringing rapid growth to previously flat U.S. power markets. The Boston Consulting Group projects that total data center power demand will increase by 15-20% annually to reach 100-130 gigawatts by 2030. That's the equivalent of the electricity used by about 100 million U.S. houses - about two-thirds of the total homes in the U.S. The U.S. may face a shortfall of up to 80 gigawatts of firm power to meet this demand by 2030, though gaps will vary in size across regional markets. Texas is on the list of states with the largest number of data centers and power consumption of data centers. Thus, the argument here is that there may be further data center construction in Texas to support the deployment of generative artificial intelligence due to the simple fact that the high level of data centers already in the state and the increasing number of technology workers means that some of the needed infrastructure to support more data centers already exists. After all, there are already workers in the region that know how to construct and maintain data center hardware. It is certainly more logical for technology companies to construct more data centers here than put them in an area like Nebraska that does not have the required employees already. If it is true that more data centers will be constructed in Texas over the coming years, then it is quite possible that some of the electricity produced and distributed by Entergy will be needed to power the hardware in these data centers. The company's revenues directly correlate to the amount of electricity that its customers consume. After all, electric bills increase when a household or business consumes greater amounts of electricity. The higher revenues coming into the company should allow more money to flow down to the bottom-line profits. Entergy has already benefited from growing electric consumption in its service territory, as our thesis suggests should be the case. Here are the company's reported revenues for each of the past eleven quarters: We do see some seasonal fluctuations here, which are mostly driven by air conditioner usage. Most of the states in which Entergy Corporation operates are very hot during the summer, so its customers run air conditioners in an attempt to cool down. Thus, we should expect the company's revenues to spike in the second and third quarters of the year because that is when air conditioning use will peak. We do certainly see that here, and we also see that the company's revenues in a given quarter were usually higher than they were in the same quarter of the previous year. For example, in the recently reported second quarter of 2024, Entergy had a total revenue of $2.9536 billion compared to $2.846 billion in the second quarter of 2023. This is a 3.78% increase year-over-year. That certainly seems small, but it is not really ridiculously low for an electric utility, as these companies grow at a very low rate and electric consumption in the United States has been fairly flat over the past several years. This chart shows the total amount of electricity consumed annually in the United States since 1975: As we can see, electric consumption in the United States has been relatively stable since 2010. This might seem to disprove our growth thesis that was described earlier, but it is important to keep in mind that this chart shows the numbers for the country as a whole. There can still be an area in which electricity consumption increases that is offset by a decrease elsewhere. Overall, this fits with the Boston Consulting Group's statement that the demand for electricity has been stagnant. Entergy Corporation recognizes this as well. Its own projections call for flat consumption from its residential customers through 2028, although industrial use is expected to increase dramatically over that period: This fits with our statements earlier in this article and in previous ones. Ultimately, it will be the case that growing consumption by industrial companies (data centers are considered industrial users) will drive the company's load growth over the next five years or so. We can see too that this growth rate should be fairly substantial, with industrial consumption growth rising at an 8% to 9% compound annual growth rate through 2028. As we discussed in the previous article, Entergy is working on upgrading its infrastructure to accommodate this projected growth. This will grow the company's rate base over the period. I explained the concept of rate base previously: The rate base is the value of the company's assets upon which regulators allow the company to earn a specified rate of return. As this rate of return is a percentage, any increase in the rate base allows Entergy to adjust the prices that it charges its customers in order to earn more money. The usual way in which a utility company increases its rate base is by spending money to upgrade its infrastructure. Entergy Corporation is planning to do that as it recently unveiled a plan to invest approximately $33 billion over the 2024 to 2028 period into its distribution network: This is a substantial increase over the $16 billion that the company was planning to invest the last time that we discussed it. The massive increase in the company's planned capital expenditure cannot be explained simply by inflation. It seems obvious that the growth in industrial consumption within its service territory is driving the company's management to realize that it needs a much more robust and capable infrastructure than was originally expected. This provides further validation that the thesis that we have been promoting for Entergy Corporation is correct. The company's new capital spending plan should be sufficient to drive its earnings per share upwards at a 6% to 8% compound annual growth rate over the 2024 to 2028 period. When combined with the current 3.89% dividend yield, we are looking at a 10% to 12% total return over the period, assuming that the company's price-to-earnings ratio remains relatively stable. That is a very reasonable total return for a utility company. As I stated in my previous article on Entergy Corporation: It is always important that we investigate the way that a company is financing its operations before we make an investment in it. This is because debt is a riskier way to finance a company than equity because debt must be repaid at maturity. That is typically accomplished by issuing new debt and using the proceeds to repay the existing debt since very few companies have sufficient cash on hand to completely pay off their debt as it matures. As new debt is issued with an interest rate that corresponds to the market rate at the time of issuance, this can cause a company's interest expenses to go up following the rollover. The usual way that we analyze a utility company's financial structure is by looking at its net debt-to-equity ratio. As of June 30, 2024, Entergy Corporation had a net debt of $27.3954 billion compared to $14.9011 billion in shareholders' equity. This gives the company a net debt-to-equity ratio of 1.84 today. This is an improvement over the 1.92 ratio that the company had the last time that we discussed it, which is very nice to see. After all, the reduction in this ratio means that the company is less dependent on debt to finance itself than it was eleven months ago, which risk-averse investors should appreciate in today's high-interest rate environment. However, as I have pointed out in a few previous articles, Entergy Corporation is somewhat more leveraged than its peers. This is still the case today, which we can clearly see here: (all figures are calculated from the most recently released financial report for each company) We can immediately see that Entergy Corporation is the median company in terms of leverage here. This is a bit different from the scenario that we have seen in the past, which generally showed Entergy Corporation being much more leveraged than its peers. It is worth noting that DTE Energy and especially Eversource Energy have been rapidly increasing their leverage, though, so that is at least partially responsible for the improvement that we see in the chart above. While the improvement here is certainly a very good thing, we can still see that Entergy Corporation's leverage remains fairly high, and it is still substantially more levered than either CMS Energy or Exelon Corporation. As such, we should certainly not celebrate the improvement here. Rather, we should continue to watch the company's leverage in order to ensure that it remains on its current course of strengthening its balance sheet. According to Zacks Investment Research, Entergy Corporation will grow its earnings per share at a 7.33% rate over the next three to five years. This gives the company a price-to-earnings growth ratio of 2.20 at the current stock price. Here is how Entergy's current valuation compares with its peers: (all figures from Zacks Investment Research) This looks pretty good for Entergy Corporation. As we can clearly see, the company's current price-to-earnings growth ratio is fairly low compared to most of its peers. Thus, the current entry price appears to be pretty reasonable. In conclusion, Entergy Corporation is fairly well-positioned to grow going forward. The company has a significant presence in Texas, which is one of the most rapidly growing states in the country. This applies to both the population and businesses, and it is the latter that will likely be the driver of forward electric consumption growth. The state may also be home to data centers supporting artificial intelligence and other high-consumption activities due to its high-tech base in a few nearby cities. That will obviously help Entergy Corporation, and the company is making the investments necessary to grow its infrastructure in support of this thesis. Entergy Corporation has also been strengthening its balance sheet and trades at a fairly attractive discount to its peers.

Enbridge: A 7.1% Yielding Sleep Well At Night Dividend Aristocrat Dream Stock (NYSE:ENB)

Looking for a helping hand in the market? Members of The Dividend Kings get exclusive ideas and guidance to navigate any climate. Learn More " Global stocks crashed with Japan's market, the epicenter of the Yen Carry trade collapse, falling 18% in two days, including the 2nd worst single-day decline in history. In the US, the VIX, the volatility index, aka "the fear index," almost quadrupled to 65.4, the 3rd highest level ever recorded. Some US stocks fell as much as 33% during Friday and Monday's sell-offs. The market had its worst day since September 2022, down 3%, with the Nasdaq down 3.4%. Always And Forever A Market Of Stocks, Not A Stock Market When you zoom out, you see that while individual stocks and ETFs might have seen extreme volatility, the broader market is doing what it's supposed to do: periodic corrections. You can't unwind the biggest carry trade the world has ever seen without breaking a few heads. That is the impression markets give us this morning," Kit Juckes, chief foreign exchange strategist at Societe Generale, said in a Monday research note." - CNBC. This isn't a concern about the US economy, and it's an internal financial markets issue, specifically a 13% rally in the Japanese Yen, which has been the basis of the $1 trillion Yen carry trade. However, there is rising recession risk, and many investors are understandably nervous since the last two recessions were historical catastrophes. So allow me to share with you why I consider 7.1% yielding Enbridge Inc. (NYSE:ENB), an Ultra Sleep Well At Night quality dividend aristocrat with a recession-resistant utility business model, a wonderful option for scary markets like these. Enbridge is the largest energy empire in North America. It's a dividend aristocrat with a 29-year dividend growth streak, 5% growth guidance, and 12.1% total return guidance, similar to the 11% returns it's delivered for 20 years. It now spans two continents, and management has a reasonable and prudent plan and growth market measured in the tens of trillions over the coming decades to continue generating rock-steady, dependable cash flow and dividends. ENB has the 2nd best growth prospects in midstream, 5.4%, according to analysts, based on management guidance of 5% long-term growth. What makes ENB special is that its 5% growth potential spans decades rather than just a few years. This isn't just a BBB+ rated dividend aristocrat; it's a dividend aristocrat with a clear plan to become a dividend king and extend the dividend growth streak to over 50 years. Enbridge is the most utility-like midstream at 98% cash flow regulated under a long-term take-or-pay contract. It is the largest gas utility in Canada, and after acquiring three new utilities, it is the largest gas utility in North America. When ENB completes the acquisition of PSNC, it will have nine million gas utility customers. Based on its renaming strategy, I expect PSNC to become Enbridge Gas North Carolina. And it's not just natural gas; ENB is also investing in electric utilities through its fast-growing green energy segment. Unlike some green energy investments, which can be speculative, ENB's investments are 100% supported by long-term contracts, including European and Canadian utilities and public companies like Amazon.com, Inc. (AMZN) and AT&T Inc. (T). Data centers that house AI models and tools are expected to double their electricity use by 2030 (7% of US electricity). That's why utilities are the lowest-risk "AI trades," ENB is one of the highest-yielding options with the best long-term return potential. The future of ENB is 100% utility, focusing on being an energy utility and not an oil pipeline company. Just like Philip Morris International Inc. (PM) is the leader in the transition to a smoke-free world, Enbridge is the industry leader in the post-oil transition for midstream. That makes it the ultimate "buy and hold forever" midstream, which is why the bond market is willing to lend to ENB for 80 years (and 100 years in recent years). A corporate management team runs Enbridge. Like The Bank of New York Mellon Corporation (BK) or The York Water Company (YORW), it has a culture built to survive and thrive for centuries to come. While delivering 12% to 13% over that time. 5-Year Consensus Total Return Potential: 100% = 14% Annually vs. 87% S&P (13% annually) 3-Year Consensus Total Return Potential: 42% = 16% Annually vs. 40% S&P (13% annually) Enbridge offers long-term market-like return potential but with lower volatility and less speculation. While S&P has to deliver 12% long-term growth to achieve these kinds of returns, 2X the historical norms, ENB has a utility-like business model that makes it much easier to determine future growth rates. When you get paid returns primarily in yield from an investment-grade dividend aristocrat, it's less uncertain that ENB can deliver 12% to 13% long-term returns and income growth. And don't forget that sleeping well at night in market downturns is priceless. Enbridge isn't just a wonderful source of very low-risk 7.1% yield; it's a remarkably defensive aristocrat. (Source: Dividend Kings Portfolio Optimizer Tool) ENB's median bear market decline is 3X less than the 60/40's and 5X smaller than the S&P. That's courtesy of its rock-solid cash flow stability, strong balance sheet, utility business model, and exceptionally long-term focused corporate culture. ENB is run like Canadian banks, focusing on perpetual sustainability and a relentless pursuit of maximizing long-term income for shareholders. ENB's growth plans are well on track. Most importantly, those three utility acquisitions are closing and are now expected to be completed by the end of Q3. ENB will deliver full benefits starting in Q4. The funding to complete the acquisitions has been completed. Enbridge isn't self-funding like its peers; instead, it's harnessing capital markets to achieve maximum sustainable growth. Management's vision is to achieve scale and diversification in a Realty Income Corporation (O) like a strategy to get as big, diversified, and dependable as possible. ENB's focus on acquiring and growing its natural gas utility business is brilliant, as the utilities it's buying are growing their rate bases at 8%. The long-term plan to maintain 4.75X leverage is prudent, similar to how Realty Income maintains a steady 6X leverage over time. It allows it to grow quickly while maintaining its industry-leading credit rating. ENB has $17 billion in secured growth projects, meaning long-term contracts are locked in. ENB is offering a very clear investment opportunity. Management guides for 10% to 12% long-term returns in a low-volatility package with a clear growth outlook for decades. According to management, its green energy capacity is 5.3 GW, which can expand by 12.1 GW by 2030. And that shadow backlog is likely to grow in the future, representing the brilliance of ENB as a high-yield income growth opportunity. ENB has a decades-long growth runway and can expand and scale continuously, no matter how large it grows. ENB now owns 25% of US liquified natural gas export capacity, a significant growth market in the coming years. LNG capacity is expected to almost double by 2027 and keep growing steadily for decades. Adjusted for inflation, Enbridge is currently guiding for 9.8% long-term returns, and analysts expect 10.2% annual returns. That might not sound sexy in the age of AI-driven tech gains, but that growth outlook isn't for a few years; it's for decades. $1,000 invested in Enbridge over 30 to 60 years can potentially deliver returns that are truly life-changing. Those returns would be primarily driven by income, as young investors who buy, hold, and DRIP for the next 60 years could earn as much as $1,600 per month in inflation-adjusted income at retirement. Invest $10,000 into ENB at age 20; by age 80, that's a potential $16,000 in monthly inflation-adjusted income. That's the kind of income compounding ENB offers. ENB pays qualified dividends and uses a 1099 tax form. There is no K1 tax form. Enbridge is a Canadian company, so US investors in taxable accounts are subject to a 15% dividend tax withholding. There is no dividend tax withholding in non-taxable accounts like 401Ks, IRAs, and Roth IRAs. For US investors, there is a tax credit to recoup the dividend in taxable accounts, avoiding double taxation. However, it requires some paperwork. As for fundamental risks, some investors dislike that ENB is not pursuing a self-funding business model, such as Enterprise Products Partners L.P. (EPD), which runs an FCF self-funding business model. FCF self-funding means zero reliance on equity markets for growth capital and, thus, zero growth association with stock price. Utilities, REITs, and ENB rely on periodic share sales and debt issuances to fund their growth (EPD also uses debt). So theoretically, if ENB's stock price is weak enough for a long time, it can slow the growth rate because it minimizes how much they can issue at the market via their ATM program. The purpose of the stock market is to allow companies to sell shares to raise growth capital. While buybacks are very popular, selling new shares is fine as long as the investment is accretive to cash flow per share and thus supports a safe and growing dividend. Enbridge has a lot of debt, and some investors worry this is unsustainable. Let's be clear. Debt on its own is meaningless. What matters is debt vs. cash flows that service debt. As is its interest coverage ratio, ENB's leverage is expected to remain stable or even fall over time. In other words, if ENB's debt goes up 10X to $600 billion, but the cash flow of its service debt goes up 10X as well, then even though its debt is very high, that debt is still safe. If You Want To Sleep Well At Night In Scary Markets, It's Tough To Go Wrong With This 7.1% Yielding Low Volatility Dividend Aristocrat.

Patterson-UTI: If We Don't Get Recession Soon, Oil/Gas Could Soar (NASDAQ:PTEN)

Various technical momentum indicators have been reversing higher since May, which could be a good omen price will soon follow. What bothers me most by the soft-landing talk on Wall Street is the fact commodity cycles require a downside. If you skip downturns to cool demand and rebalance supply, you will find yourself in an endless mathematical loop of shortages, where prices climb or are flat, year after year. I don't think the average Wall Street analyst or small retail investor understands the "need" for recessions. At the same time, everyone likes to complain about rising inflation. Well, you cannot have your cake and eat it too! Follow my logic: if we don't get a recession, but instead find ourselves with a rebounding global economy next year, crude oil and natural gas prices could spike. It's really that simple. Tight supply/demand balances in both today, with depleting wells producing the stuff and only limited investment in new production since the 2020 pandemic bust, mean a 50% to 100% gain in both could become reality soon. Don't say crude oil and natural prices are expensive already because they are not. When you adjust for inflation in the general economy over the decades, crude oil is actually less expensive than average, with natural gas hitting modern-record lows in 2024. For example, the US$140 crude oil peak of 2008 works out to $200+ CPI-adjusted, a long distance from today's price in the mid-$70s per barrel! And, if prices do spike, investment dollars will once again roll into drilling and servicing wells, as profits for oil businesses will jump. The world will scramble for new energy supplies, and businesses like Patterson-UTI Energy, Inc. (NASDAQ:PTEN) will be the primary beneficiaries. Patterson is one of the leading independent contractors for drilling services in America, actively operating 108 rigs in July. Given early August's reset expectation of further weakening in the economy, the market has pushed Patterson's valuation into a super-cheap position. My view is now may be an intelligent time to acquire shares at a bargain level, just before operating growth picks up. On the flip side of the reward/risk equation, assuming we do get a recession, PTEN may not witness much sustainable downside as it is already discounting a recession. Many experienced, forward-thinking investors may start to prepare for the next energy upturn purchasing a stake on any material weakness. It's kind of a win-win setup from my vantage point, given you hold shares for a couple of years. For some background, Patterson-UTI is benefiting from the accretive effects of merging with NexTier last year (55% PTEN/45% NexTier makeup), which is adding to cash flow and EBITDA on new non-cash goodwill amortization and depreciation. If you will, synergies and added cash kept per dollar of sales could be the catalyst for PTEN's next bull run. The one recurring point in the valuation data I will highlight is current statistics look quite similar to past recession bottoms. In the following charts I will draw comparisons back to 2000, with three recession periods for reference (2001, 2008-09, and 2020). We can start by reviewing company ownership value (price and equity market cap) vs. free cash flow generation. Wall Street's main yardstick for a business in the present day looks at how much cash could I get back each year as a single owner of operations. Really, only several months during the once-in-a-lifetime crude oil bust of the 2020 pandemic delivered a better buy entry on free cash flow over the last 24 years! When we invert the same free cash flow number into a "yield" on our investment, the 13.4% rate today is quite attractive, especially if an upturn in oil & gas is at hand under a soft-landing (or Goldilocks) scenario. Further, when we include debt with equity totals, then subtract cash on hand, the enterprise value appears to be equally as cheap. EV to EBITDA of 3.57x and EV to Revenues of 0.84x are quite rare in combination. The only two periods priced statistically lower were the first few months of 2009 (the middle of the Great Recession) and March-May 2020 (the worst of the pandemic hardship on equity pricing). What about tangible book value readings after the NexTier merger? Well, the current 1.57x ratio of price to tangible book value is substantially below its long-term 2.0x average, although higher than experienced between most of 2009-2021. The good news is the merger did not eliminate all of its tangible book value. Plus, I expect strong cash flows and a jump in future earnings to quickly increase tangible book value totals (reducing this ratio). Lastly, the dividend yield story is quite attractive, assuming an energy upturn is about to begin. The company can easily afford its $0.32 per share payout, with free cash flow generation of $1.19 per share over the latest 12-month span. The 3.6% trailing yield is also far better than what the majority of other U.S. stocks are paying to owners. In fact, PTEN's cash distribution is 2.78x the prevailing rate of the S&P 500 index, a bullish spread only surpassed for a few months during the pandemic oil/gas bust. For my money, a positive reversal in momentum underlying the stock quote has been taking place since early May. On Balance Volume bottomed at that point (circled in green on the 12-month chart below) and has been moving strongly higher in the face of still declining price. Then, on a large volume day in June, the Accumulation/Distribution Line (circled in blue) and 20-day Chaikin Money Flow indicators reversed. In my research, the closest cousin for a chart pattern in PTEN was outlined during early 2016, which also proved a major bottom for the quote. Over the last decade, this was the only other instance of rising On Balance Volume and a flatlining (or better) Accumulation/Distribution Line not declining in near lockstep with price. The slowly descending price pattern with limited selling visible in the Chaikin Money Flow calculation between July 2015 and January 2016 also rhymed with today's pattern. Another point I have been hitting on over the past year in my articles is recessions often begin as oil/gas prices spike at the end of an economic upcycle. If this situation plays out again (like 1973-74, 1980-81, 1990, 2007-08), Patterson-UTI may have one last oversized reason to rapidly climb in price. For sure, with the Middle East experiencing major conflict and turmoil since Hamas invaded Israel in October, the odds of some sort of crude oil supply disruption are quite high if Iran becomes more directly involved. Iran could attack ships in the Persian Gulf or retaliate against oil production in U.S.-friendly Arab states (perhaps through sabotage). Wall Street analysts are already calling for 2024's punk earnings result to improve dramatically in 2025-26, without the help of a large jump in energy commodities. Rig demand and pricing have been under pressure from the dip in crude oil and natural gas prices during 2023, after the spike highs during 2022's Russian invasion of Ukraine. I am using the below forecasts as my conservative baseline to build upon if oil/gas prices begin to advance again. Without doubt, falling energy prices in a severe recession would be my #1 risk to consider before investing in Patterson-UTI. The dip in crude oil prices this past week on the rise in U.S. unemployment highlights that downside is still possible in PTEN. If you believe a major recession and/or weakening energy demand are the future (green energy may zap fossil fuel demand over the next 5-10 years), I cannot blame you for passing on this investment choice. Yet, when I pull all the ideas together, I feel strongly Patterson-UTI's upside potential over the long-term is well worth taking on the recession risk in late 2024. Using valuation setups only as our guide, I have circled in green the important price bottoms that occurred the last three times PTEN's undervaluation level reached the same extreme as today (using a combination of the statistics presented in this story). For a few months during 2009 and 2020, price did trade lower. However, the upside advances 12 months to several years later were quite positive in terms of "outperformance" of the S&P 500 and material gains for shareholders. Does this guarantee a major reversal in price is near? No. A stock market crash (led by Big Tech, AI names) and/or a severe recession are honest risks that could still send PTEN under $5 per share before the year is out. Nevertheless, buying on weakness could prove a rewarding trading angle, if history does repeat. I don't believe Wall Street is ready for a new oil/gas upcycle to start in the coming months (or quite possibly through a "black swan" eruption of trouble in the Middle East any day now). Given a soft-landing economy with a $15 to $20 per barrel rise in crude oil toward $100, alongside a rebound to $3 to $4 MMBtu for natural gas, rig orders for the company should be quite robust in 2025. I do own a small position in my diversified portfolio, which I may add to over time. With reversing technical momentum into positive ground on the charts, I am comfortable with the view PTEN's bullish proposition is well supported. I rate Patterson-UTI a Buy under $11 a share, for a 12-month investment outlook. Strong Buy territory is pegged under $6.