4 Midcap Energy Stocks to Buy Now

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When it comes to investing, midcap stocks — or those with markets caps between $2 and $10 billion — have historically been the sweet spot for long-term portfolio gains. All in all, midcap stocks have outperformed their larger and smaller twins over the longer haul, when adjusted for risk.

enbridge energy oil pipeline 630

Source: Flickr

You’ll find that the same phenomenon often holds true in midcap energy stocks.

For midcap energy stocks, their “Goldilocks” stature affords them the best attributes of large- and small-cap stocks. Typically, midcap energy stocks benefit from stable business models that throw off stronger cash flows than smaller equities. On the other hand, midcaps are just small enough to grow faster than their larger counterparts, making them ideal candidates for capital appreciation. And there’s plenty of strong dividend potential as well.

That means for investors looking to add some real energy muscle to portfolio, midcap stocks have to be on their watch list. Here are four of the best:

Midcap Energy Stocks to Buy #1: Diamond Offshore Drilling

midcap energy stocks diamond offshore doMarket Cap: $6.9 billion

Longer-term, the offshore drillers of oil & natural gas are sitting pretty. After all, we continue to dive deeper to find new deposits of hydrocarbons, and that takes some serious muscle and spending.

In the short run, that has meant an environment of high drilling rig supply and lower demand. In turn, that has sent earnings — as well as share prices — for these energy stocks downward.

Which is why midcap energy stock Diamond Offshore Drilling (DO) could be an interesting bet. DO stock has fallen around 17% this year. But better days could on the horizon.

Morgan Stanley analysts, for one, believe that DO shares have finally hit a bottom and much of the downward earnings revisions have been priced into the stock. Meanwhile, despite the difficult price environment, Morgan Stanley estimates that even with new drilling rig supplies hitting the market over the next year or so, the vast majority of rigs — even Diamond’s older and less state-of-the-art offshore rigs — still will find renters.

As for those rigs, they’re workhorses, operating in some of the Gulf’s larger and shallower seas, and they continue to throw off some pretty hefty cash flows — cash flows that have allowed Diamond Offshore to pay some hefty special dividends year after year since 2006.

Midcap Energy Stocks to Buy #2: MPLX LP

mplx-185Market Cap: $4.7 billion

Sometimes, great midcap energy stocks are actually born from other great energy stocks.

Case in point: pipeline and midstream player MPLX LP (MPLX). Spun off from refiner Marathon Petroleum (MPC), MPLX is becoming a huge winner in its own right.

MPLX controls nearly 2,900 miles worth of raw oil and finished petroleum product pipelines as well as four storage tank farms and an export/import dock. These assets primarily feed MPC’s own refiners and energy trading facilities. As such, MPLX gets a steady dose of cash flows from its parent for operating the pipelines.

At the same time, recent deals by Marathon will allow MPC to “drop down” additional pipeline assets in MPLX. Those assets will only serve to strengthen and grow MPLX’s dividends and cash flows.

Bullish, bullish, bullish.

All in all, MPLX’s earnings growth rate for the next five years is pegged at roughly 30%, not to mention the earnings-per-share growth rate of 70%-plus on tap for this year. That kind of earnings growth will easily fuel MPLX distribution hikes (like the 19% year-over-year bump in MPLX’s last payout).

Of course, the dividend has plenty of catching up to do, as MPLX already is up more than 70% in the past year.

Midcap Energy Stocks to Buy #3: Denbury Resources

denbury-resources-185Market Cap: $6.5 billion

Denbury Resources (DNR) is a curious bird in that it doesn’t focus really on traditional energy drilling. It’s an unconventional player, leading the way as a provider of enhanced oil recovery (EOR) drilling techniques.

Basically, DNR buys up older fields from other energy firms like Exxon Mobil (XOM) — often on the cheap.

The high risk of prospecting for new finds is non-existent at the firm and DNR has pretty good knowledge about how much oil is still remaining when it buys a field. The midcap energy stock then uses CO2 injection to help “propel” any remaining oil upwards through the wellhead. It’s been pretty successful at doing that and currently has around 468.3 million barrels worth of oil equivalent on its books. More importantly, 83% of those reserves are crude oil.

It also produces some real nice production growth. By flowing its EOR strategy, DNR predicts it will grow its production by 4%-8% until 2020.

Investors are treated to rising cash flows and newly adopted dividend policy. DNR stock shares currently yield 1.4%.

Midcap Energy Stocks to Buy #4: Goodrich Petroleum

goodrich-petroleum-gdp-185Market Cap: $1.27 billion

The Eagle Ford, Bakken and Marcellus shales are so-yesterday. Today, the hottest shale formation can be found in the Tuscaloosa Marine Shale

Playing that field like a fiddle is Goodrich Petroleum (GDP) — a company easily on the lower end of the market cap range for midcap stocks (and by many measures, on the high end of small caps).

Located in Louisiana and Mississippi, the Tuscaloosa Marine Shale is one of the most underdeveloped shale fields in the country. Yet it promises to be a whopper. The geology there mirrors the Eagle Ford and analysts estimate that the amount of oil trapped there could be equally as big.

Leading the way is GDP’s huge acreage position- which is roughly 3x larger than any of its rivals in the shale. Additionally, GDP has managed to hit some pretty big pay dirt with its initial test wells. While expensive to tap, those wells have all come back with 90% or better as higher priced oil. Meaning, GDP should be able to get better margins for its production in the play.

At first blush the midcap energy stock’s production numbers appear to be dropping. But that’s due to the firm’s recent divestures of its more natural gas focused assets. Basically, GDP is becoming a leveraged play on the Tuscaloosa- more than 80% of its CAPEX is going into the field.

And if the field turns out to be a real gusher like GDP’s initial test wells, investors could really be clean house.

As of this writing, Aaron Levitt was long MPC.

Aaron Levitt is an investment journalist living in Ohio. With nearly two decades of experience, his work appears in several high-profile publications in both print and on the web. Also likes a good Reuben sandwich. Follow his picks and pans on Twitter at @AaronLevitt.


Article printed from InvestorPlace Media, https://investorplace.com/2014/06/midcap-energy-stocks-do-mplx-dnr-gdp/.

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