Pipeline and Midstream Energy Stocks have had a good start to 2024. This is reflected in the performance of major sectors exchange-traded funds (ETFs) as the Alerian Energy Infrastructure ETF (NYSEMKT: ENFR)up about 18% since the start of the year, and Alérian MLP ETF (NYSEMKT:AMLP), up almost 17%. The latter includes only shares of midstream companies structured as master limited partnerships (MLPs), while the former includes midstream companies structured as both MLPs and corporations.
Although the first half of the year was positive for the sector, there is strong reason to believe that a number of stocks in the sector could be poised to outperform in the second half and beyond.
Let’s look at three mid-tier stocks that should outperform the rest of this year and into the future.
MPLX (NYSE: MPLX) is a intermediary company involved in logistics and storage as well as collection and processing (G&P). Refiner Marathon Oil owns approximately 65% of the company and represents just under 50% of its turnover.
The stock has an attractive yield of 8% based on its most recent distribution and had a strong coverage ratio of 1.6 times in the first quarter of 2024. At the same time, its balance sheet is in good health with a leverage ratio (debt net/adjusted EBITDA) of only 3.2 times. The company has performed consistently, increasing its base distribution every year since 2012.
The company is well positioned in Appalachia (Marcellus and Utica) and the Permian, with a strong pipeline of growth projects in both regions over the next few years. It plans to spend $950 million in growth capital expenditures (capex) this year. The company also recently acquired certain G&P assets in Utica and entered into an agreement to merge the Whistler and Rio Bravo pipeline projects into a new joint venture to connect Permian supply with incremental Gulf Coast demand, which it believes will drive future growth opportunities.
Situated in the right basins, MPLX appears well positioned to continue growing its distributions, while its forward enterprise value (EV) to EBITDA (earnings before interest, taxes, depreciation and amortization) of 9.6 times (one of the most common methods of valuing midstream stocks) is attractive and well below the 13.7 times multiple at which the sector traded between 2011 and 2016.
MPLX EV/EBITDA (forward) data by Y Charts
Western Intermediate Current
One of the best performing midstream stocks in the first half was Western Intermediate Current (NYSE: WES), up about 35%. The company mainly serves Western oilgathering and processing (G&P) needs in the Delaware Permian, Powder River Basin (PRB) and Denver-Julesburg (DJ) basins.
The company started the year strong, reporting record adjusted EBITDA of $609 million in the first quarter, up 22%, while its free cash flow soared 60% to $225 million. This prompted Western to announce that it expected its adjusted EBITDA to reach $225 million.
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