For investors seeking high-yield opportunities with solid growth potential, the midstream energy sector offers a compelling option. With attractive yields and valuations below historical multiples, midstream stocks like Enterprise Products Partners (NYSE: EPD), Energy Transfer (NYSE: ET), and Western Midstream (NYSE: WES) stand out as strong candidates for a buy-and-hold strategy.
Why the Midstream Sector?
Over the past decade, midstream companies have transformed their business models. Many have reduced leverage, focused on disciplined growth, and eliminated incentive distribution rights (IDRs), which previously eroded shareholder value. Despite these improvements, the sector trades below the historical 13.7x earnings multiple observed between 2011 and 2016, presenting an undervalued opportunity.
1. Enterprise Products Partners (EPD)
With a forward yield of 6.5%, Enterprise Products Partners is a cornerstone of stability in the midstream space. The company has consistently increased its distribution for 26 consecutive years, even during challenging economic cycles. Its fee-based revenue model, low leverage, and well-covered distribution (1.7x distributable cash flow) make it a reliable choice for income-focused investors.
Enterprise is also capitalizing on growth opportunities, particularly in natural gas and power demand driven by artificial intelligence (AI) data centers. Its extensive pipeline and storage network position it to benefit from these emerging trends.
2. Energy Transfer (ET)
Energy Transfer boasts one of the most attractive integrated midstream networks in the U.S., with a forward yield of 6.8%. Although the company faced setbacks during the pandemic, including a temporary distribution cut, it has since restored its payouts and plans to increase distributions by 3%-5% annually.
Energy Transfer’s assets in the Permian Basin give it access to cheap associated natural gas, ideal for meeting rising demand from AI-focused data centers. The company is also fielding requests to connect its natural gas pipelines to numerous power plants and data centers across the U.S., highlighting its growth potential.
3. Western Midstream (WES)
With a yield of 9.2%, Western Midstream offers one of the highest payouts in the midstream sector. The company has achieved its leverage target of under 3x and is now positioned to issue excess distributions, potentially starting in early 2025.
While Western Midstream faces slight headwinds, including adjusted EBITDA reductions from asset divestitures, its strong presence in the Delaware Basin and robust financial position make it a resilient investment. The company is also exploring growth opportunities through increased capital expenditures and potential acquisitions.
Key Takeaways
These midstream stocks combine high yields with strong financial fundamentals, making them attractive long-term investments. They benefit from disciplined management, growing demand for natural gas, and alignment with macroeconomic trends like the rise of AI data centers.
Should You Buy Now? For income-focused investors, midstream stocks like EPD, ET, and WES offer a blend of stability and growth. However, as with any investment, it’s essential to consider individual financial goals and risk tolerance.
Disclaimer: This article is for informational purposes only and does not constitute financial advice. Always consult a financial advisor before making investment decisions.
