3 Left-for-Dead Energy Stocks Showing Signs of Life

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Last quarter was about as close as you’re going to get to a proverbial “blood in the streets” moment in energy stocks. Crude oil prices were in freefall, bankruptcies loomed and the entire midstream master limited partnership business model was being called into question.

3 Left-For-Dead Energy Stocks Showing Strong Vitals

Source: iStockphoto

It looked like things would never get better.

And unfortunately, the blood in the streets moment actually included a high-profile death. Former head of Chesapeake Energy Corporation (CHK) Aubrey McClendon was killed in a fiery car crash on March 2 — the day after he was indicted for rigging bids for oil and gas leases.

McClendon’s apparent suicide didn’t quite mark the bottom in energy stock prices, but it came close. Most energy stocks had started to rise about two weeks before and haven’t looked back since.

Here’s a look at three midstream energy companies that had been previously left for dead but are now on fire.

Left-for-Dead Energy Stocks Showing Signs of Life: Kinder Morgan Inc (KMI)

Left-For-Dead Energy Stocks Showing Strong Vitals: Kinder Morgan Inc (KMI)Distribution Yield: 2.8%

I’ll start with the granddaddy of the midstream sector, Houston-based Kinder Morgan Inc (KMI). It might be a bit of a stretch to say that Kinder Morgan is “on fire.” KMI stock has been bouncing around between $18 and $19 per share for about two months. But this is a stock that bottomed out earlier this year at just $11.20.

Kinder Morgan released a mildly disappointing earnings release this past quarter that sapped investor enthusiasm for the stock. But I wouldn’t spend too much time worrying about it.

Everyone knows that growth will be slow for the next several quarters due the lingering effects of low energy prices and due to Kinder Morgan high grading its backlog by eliminating less profitable projects. KMI’s plan to “de-risk” its balance sheet by funding growth internally and using extra cash to pay down debt is on track, and shareholders will reap those rewards for years to come.

And in the meantime, investors are getting paid to be patient. KMI sports a distribution yield of 2.8%, making it competitive with a corporate bond in this yield environment. And within the next 18 months, I expect Kinder Morgan to start hiking the distribution again, rewarding those investors that stuck it out.

Left-for-Dead Energy Stocks Showing Signs of Life: Energy Transfer Equity LP (ETE)

Left-For-Dead Energy Stocks Showing Strong Vitals: Energy Transfer Equity LP (ETE)Distribution Yield: 10.3%

Up next is one of Kinder Morgan’s pipeline rivals, Dallas-based Energy Transfer Equity LP (ETE). ETE was the proverbial red-headed stepchild of Wall Street for the first six weeks of the year.

It seems that every other day there was some new piece of bad news that slapped the stock around. There was the sudden sacking of ETE’s CFO, the plunging price of energy and the disastrous planned merger with Williams Companies Inc (WMB) that promised to saddle the company with crippling debt.

ETE finished last year at $13.74. Earlier this year, it bottomed out at $4.00, and at one point, the stock was down over 70% year to date.

But this fear was massively overblown. Even in the worst-case scenario with the Williams merger, in which ETE would have been on the hook to pay Williams shareholders $8 per share in cash amidst plunging energy prices, the risk was that ETE might have to suspend its distribution for a while. That’s a pretty modest risk, yet the stock was priced as if it was going out of business.

Now, as it looks like the deal might be falling apart, ETE shares have nearly tripled from its February lows. There can — and probably will — be some setbacks in the months ahead. But I expect ETE to finish the year sharply higher.

Investors that had the intestinal fortitude to buy this stock will be rewarded for their boldness.

Left-for-Dead Energy Stocks Showing Signs of Life: Teekay Corporation (TK)

Left-For-Dead Energy Stocks Showing Strong Vitals: Teekay Corporation (TK)Distribution Yield: 1.9%

And finally, I’d like to highlight seaborne midstream energy company Teekay Corporation (TK).

Teekay slashed its distribution late last year when it became concerned that, due to the deteriorating conditions of the credit markets, the MLPs it manages might not be able to rollover maturing bonds. Investors had bought TK shares expecting to enjoy 10%-15% annual distribution growth. So when they got a cut instead, they reacted violently.

Before the dust settled, TK — which had been trading over $60 per share a couple years ago — dropped to just $4.37 per share.

But anyone who bothered to look at the actual financials would have seen that TK was — and still is — a fantastic bargain. TK holds the incentive distribution rights for two midstream MLPs, both of which are financially healthy and operating under long-term contracts from oil majors.

When the MLPs start to raise their distributions again — and I expect they will in the next year — TK will start raising its distribution again, and investors that waited it out are likely to make a windfall.

Charles Sizemore is the principal of Sizemore Capital, a wealth management firm in Dallas, Texas. As of this writing, he was long ETE, KMI and TK.


Article printed from InvestorPlace Media, https://investorplace.com/2016/04/3-left-for-dead-energy-stocks-kmi-tk-ete/.

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