One of the few safer havens in this market chaos has been energy stocks, for predictable reasons – demand has driven oil and gas prices through the roof, and supply shortages caused by Russia’s ouster from the world economy have ensured they’re likely to stay that way for a while.
And we can’t look to renewables to change the picture anytime soon. The bottom line is, there’s just not enough capacity in renewables to handle our energy needs. Hydrocarbons are where it’s at right now, and it’ll probably be that way for decades.
Right now, traditional energy is almost a plug-and-play moneymaker. Even a dirt-simple pick like the Energy Select Sector SPDR ETF (NYSEArca: XLE) is letting investors run circles around the S&P 500, up about 25% year to date vs. the S&P’s abysmal -18% over the same time period.
But to really turbocharge your returns from this space, you have to dig a little deeper, especially if you want to build up a portfolio that includes a lot of income-generating investments as a hedge against volatility elsewhere.
When I’m looking for these kinds of stocks, one of the first things I do is try to find dependencies. Basically, it’s investing in “the thing behind the thing.” Last year, when EV cars were having their moment in the spotlight, the smarter play was to invest in lithium mining, because you can’t make a battery for an EV car without lithium.
Today’s pick follows that principle. It’s a master limited partnership (MLP) that owns a crucial part of the traditional energy sector, yields double-digit dividends right now, and has outstanding return potential over the next several years.
Let me tell you all about it…
Why MPLX Is the Best Energy Infrastructure Stock Right Now
MPLX LP (NYSE: MPLX) owns assets that gather, store, and transport oil and gas, as well as natural gas liquid products like butane and propane.
It was formed by Marathon Petroleum back in 2012, which remains its largest owner and customer, holding a little over 60% of MPLX shares.
The reason it’s such a solid player is pretty simple: if it’s used to move oil and gas around, MPLX owns some of it.
There are two divisions to MPLX’s business: gathering and processing, and logistics and storage. Simply put, they own assets that extract and process oil and natural gas as well as assets that store and ship oil and gas to customers. They’re part of the entire process, start to finish.
Here are some of their key assets:
- 13,000 miles of pipeline throughout the continental United States and Alaska.
- Storage caverns with a combined capacity of 4.7 million barrels in West Virginia, Michigan, Illinois, and New Mexico.
- Terminal facilities for the receipt, storage, and blending of refined petroleum products throughout the continental United States and Alaska, with a combined total capacity of approximately 34 million barrels.
- Rail and truck loading lanes/racks, in addition to barge docks, which support the transportation of oil and gas via rail, over the road, or marine.
- A marine business that owns and operates 23 boats and 286 barges, including third-party chartered equipment, and includes a Marine Repair Facility, a full-service marine shipyard located on the Ohio River adjacent to Marathon’s Catlettsburg, Kentucky refinery.
- A large interest in LOOP LLC, the only U.S. deep-water oil port located offshore of Louisiana. The port is used for both importing and exporting crude oil.
It is an incredible collection of almost irreplaceable assets. No one wants pipelines or oil terminals and tank farms in their neighborhood, so getting a new one built would be a challenge, to say the least.
While 2020 and the wild moves in the energy markets did impact the company, the fact that most of their business is done on long-term contracts with fixed commitments helped MPLX weather the storm better than most energy companies and MLPs.
Case in point, while many MLP’s were forced to cut their dividend, MPLX kept payments steady.
They’re currently yielding almost 12%, so we get a big chunk of the anticipated total return in cash upfront every quarter.
MPLX has also been aggressive about protecting that payout. In the latest earnings discussion, they said that they are on target to reduce capital spending by over $700 million and operating expenses by approximately $200 million.
During the third quarter, the new Wink to Webster Permian crude oil pipeline project achieved mechanical completion on the main segment connecting the Permian Basin to Houston, Texas. That pipeline started moving oil and gas in the fourth quarter.
Before the first gallon went into the pipeline, 100% of the capacity was contracted with minimum usage commitments.
Whistler natural gas pipeline project that will move gas from Waha, Texas, to Agua Dulce market hub in South Texas is 90% completed and should be in service in the second half of 2021.
The main point to all of this is that new cashflows for MPLX.
As conditions have improved in oil and gas pricing, management at MPLX has become excited about its business’s long-term prospects. Their oil- and gas-producing customers have been able to use the cash flow from higher prices to rebuild shattered balance sheets from the madness of the spring.
More mergers and acquisitions in the oil and gas industry are also providing MPLX with more financially strong companies in its customer base.
In fact, MPLX is so confident in the future of the oil and gas industry in general and its operations specifically that the board authorized a unit repurchase program of up to $1 billion of its outstanding publicly traded common units.
We have some strong partners as fellow shareholders: Blackstone, TGP Group, Brookfield… some of the biggest names in asset management have stake in MPLX.
All of this should be great news for the stock price. When I plug the dividend and cash flows into my calculators, I cannot come up with a value for this company of less than $40 a share – and it’s currently trading around $29 as of this writing.
Combined with double-digit dividend payout, the total return potential of MPLX is outstanding over the next several years.
No investment is risk-free, and MPLX is no different. The price of the partnership is heavily influenced by oil and gas prices. Declines in the price of oil could cause the shares to sell off at some point. But MLPX has a decent balance sheet, and it has been improving its strength lately, so I am confident that it can survive market turmoil just as it did last year.
— Tim Melvin
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Source: Money Morning