3 Incredibly Cheap Energy Stocks

3 Incredibly Cheap Energy Stocks

The efforts to contain COVID-19 have resulted in a massive supply/demand imbalance in the energy sector, leaving oil trading at a very low level. Investors have fled the sector, which creates a potential opening for long-term investors looking for cheap stocks. Here are three worth deep dives today: Enbridge (NYSE: ENB), Enterprise Products Partners (NYSE: EPD), and Magellan Midstream Partners (NYSE: MMP).

1. North of the border

Hailing from Canada, Enbridge’s massive collection of oil logistics infrastructure (about 50% of adjusted EBITDA) and natural gas (30%) assets spans North America. It also owns a natural gas utility business and renewable power facilities (effectively the rest of adjusted EBITDA). The company estimates that 98% of its top line is fee-based or regulated, providing material consistency to its business. Meanwhile, the diversified portfolio is expected to offer multiple growth options in the future, with Enbridge expecting distributable cash flow to increase between 5% and 7% in 2021 and 2022. 

An energy pipeline with a man welding

Image source: Getty Images

The current dividend yield is a hefty 8.2%, the highest it has been since the 1990s. Using yield as a proxy for valuation, now looks like an attractive time to buy this giant. Meanwhile, despite a historically high use of leverage, the Canadian midstream company has increased its dividend annually for 25 consecutive years. Over the past decade the average annual increase was a heady 13%. Dividend-focused investors should like what they see here. 

2. The U.S. giant

Rivaling Enbridge on the scale front is U.S.-based Enterprise Products Partners, a midstream master limited partnership with a vast collection of pipelines, storage, processing, and transportation assets in North America. More than 85% of its gross margin is tied to fees, so it largely gets paid for the use of its assets; the value of the products flowing through them is less important. Although Enterprise expects growth to slow because of the energy industry spending pullbacks related to COVID-19, it still has around $5.6 billion worth of projects in the works over the next three years or so. In other words, despite the current industry headwinds, it is still expanding its reach — just at a slower pace than previously expected. 

Enterprise’s units currently yield 10.7%. That’s near the highest levels in the partnership’s history. The distribution has been increased annually for 23 consecutive years. And, notably, the company’s financial debt to EBITDA ratio is near the low end of its peer group (and about half that of Enbridge’s). This is a slow and steady tortoise, but for conservative types it could be a steal today.

3. A smaller option

With an $8 billion market cap, Magellan Midstream, the last name here, is tiny compared to Enbridge ($61 billion) and Enterprise ($36 billion). Its business isn’t as diversified, either, with refined product pipelines and assets accounting for about 60% of its operating margin and its midstream oil business making up the rest. Roughly 85% of its revenue is fee-based. However, Magellan has a long history of slow and steady growth behind it.

That said, management has pulled back on its growth spending plans, and is currently saying that it will maintain its distribution through the end of 2020. This has some investors fearing a distribution cut, which isn’t an unreasonable fear given the state of the broader energy sector. 

ENB Financial Debt to EBITDA (TTM) Chart

ENB Financial Debt to EBITDA (TTM) data by YCharts

The yield today is roughly 11%, which is near the highest levels in the partnership’s history. Moreover, it has long taken a conservative approach with its balance sheet: Financial debt to EBITDA, for example, is around 3.2 times today. That’s below those of both of the names above. And it is worth noting that the distribution has been increased annually since Magellan’s 2001 IPO. The current coverage ratio of around 1.1 times is tighter than expected, but not out of line with historical norms. Although there is some risk of a distribution cut, Magellan’s price is down nearly 60% from the highs it reached in 2014. With a material fee-based business backing it, this conservative midstream partnership could be a worthwhile bargain even if the distribution gets trimmed. 

Potential gems in an ugly sector

The energy industry is clearly out of favor right now, and there are areas that are extremely high-risk today, like small and highly leveraged wildcatters that had been hoping they would strike it rich drilling for oil.

However, the midstream segment of the energy patch is very different, with a heavy focus on earning fees for simply moving oil, natural gas, and other products around. But Wall Street looks like it is tossing the baby out with the bathwater again, and pushing even steady, boring businesses lower. If you are willing to step in while others are fearful, consider Enbridge, Enterprise, and Magellan. They all look pretty cheap today, particularly if you believe that the world will eventually quell the pandemic that’s caused so much havoc in the energy sector.

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Reuben Gregg Brewer has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Enbridge. The Motley Fool recommends Enterprise Products Partners and Magellan Midstream Partners. The Motley Fool has a disclosure policy.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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