This past week has been a brutal one for the markets. Nearly everything has plunged deeply into the red, with the energy sector among the hardest hit, fueled by a historic sell-off in the oil market…
The oil price plunge — driven by dual shocks to demand from the COVID-19 outbreak and supply from OPEC’s price war with Russia — will negatively affect oil companies. However, some are in a better position to weather this storm than others. Three that stand out are pipeline giants Enbridge (NYSE:ENB), Kinder Morgan (NYSE:KMI), and Enterprise Products Partners (NYSE:EPD). Here’s why investors might want to consider buying one of these energy companies even though industry conditions currently look bleak.
Focused on risk mitigation
Enbridge is one of the largest energy infrastructure companies in North America, including operating the largest oil pipeline network on the continent. What’s important to note about the company’s systems is that they generate highly predictable cash flow because it often gets paid fees even if customers don’t use their contracted capacity. Overall, take-or-pay contracts or regulated rates underpin about 98% of Enbridge’s annual earnings. Further, 93% of its customers have investment-grade credit, which dramatically increases the probability that they have the financial resources to weather this storm.
The company complements its stable cash flow profile with a sound financial base. Like the majority of its customers, Enbridge has an investment-grade credit rating. Further, its leverage ratio is at the low-end of its target range because it spent the past few years selling non-core assets to firm up its financial foundation. The company also has a conservative dividend payout ratio. Because of these factors, Enbridge’s dividend — which yields 9.4% as a result of its stock price plunge this year — appears to be on a sustainable foundation.
Well-protected cash flow
Kinder Morgan shares many of the same characteristics as Enbridge. It currently gets 64% of its cash flow from take-or-pay contracts, 27% from volume-based fees, and has commodity priced hedges supplying another 5%. Meanwhile, 78% of its customers have investment-grade credit ratings or something similar. These factors help fortify the company’s cash flow.
The company complements its stable cash flow profile with a strong investment-grade balance sheet, which is in its best shape in years after several recent asset sales. Kinder Morgan now has enough financial flexibility this year to fund its dividend — which it plans to increase by 25% from last year’s level — and all its expansion projects with an estimated $1.2 billion to spare that it could use to opportunistically repurchase its stock. These factors suggest that Kinder Morgan’s dividend — which has spiked to a more than 7% yield before factoring in its expected increase — is on a sustainable foundation.
Best in its class
Enterprise Products Partners, meanwhile, has one of the highest credit ratings in the energy midstream sector backed by a low leverage ratio for the industry. That gives it unparalleled financial flexibility during times like these. The company complements its top-tier balance sheet with a conservative dividend payout ratio. The company’s payout, which has seen its yield skyrocket above 11%, is on a firm foundation.
The company has so much financial flexibility that it can fund its dividend, expansion program, and opportunistically repurchase its shares. Given the major decline in its value in recent weeks, Enterprise Products will likely take advantage of the recent weakness to scoop up shares.
Well positioned for times like these
Enbridge, Kinder Morgan, and Enterprise Products Partners spent the past several years firming up their financial foundations so that they…
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