Midstream companies are vital to the energy sector. They gather, process, transport, store, and export crude oil, natural gas, and related products. These companies are paid fees for providing midstream services to other companies in the energy industry. That stable income gives them the cash to pay lucrative dividends while investing in expanding their midstream operations.
The midstream sector is having a strong year, fueled partly by the anticipation of accelerated growth in the coming years as artificial intelligence (AI) data centers power more electricity demand. Several pipeline stocks still look attractive as we head into the new year.
As we close the books on 2024, Enbridge (ENB 0.05%), MPLX (MPLX -0.34%), and Enterprise Products Partners (EPD -0.23%) stand out to a few Fool.com contributors as great ones to buy, offering compelling income streams and growth prospects.
Enbridge is bridging the gap
Reuben Gregg Brewer (Enbridge): One of Enbridge's goals is to provide the world with the energy it needs. That means roughly 75% of earnings before interest, taxes, depreciation, and amortization (EBITDA) is derived from oil and natural gas pipelines right now. This is vital energy infrastructure that generates consistent fee income over time because of the still integral role of carbon fuels within the global economy.
That said, about 22% of EBITDA is derived from regulated natural gas utilities, up from 12% a couple of years ago thanks to the acquisition of three utilities from Dominion Energy. This move pushed oil pipeline exposure from 57% of EBITDA to 50%, and natural gas pipelines fell from 28% of EBITDA to 25%.
But here's the interesting thing: As the world shifts toward cleaner energy sources, natural gas is acting as a transition fuel because it is cleaner than oil. The utility acquisition lowered oil exposure and increased overall natural gas exposure from 40% of EBITDA to 47%. Enbridge is living up to its goal of providing the world with the energy it needs.
That brings up the last 3% of EBITDA, which is generated from renewable power assets. This is where, over the long term, the world is heading with its power needs. But there's still a long way to go before clean energy displaces carbon fuels, so look for Enbridge to keep building this segment up as it shifts along with the world.
Here's the really exciting part. You can buy this purposeful and transitioning energy business and collect a fat 6.2% yield. Note, too, that the dividend has been increased every year for 30 consecutive years (in Canadian dollars). There's a lot to like here for income investors who want a clean energy hedge.
A high-octane income stream
Matt DiLallo (MPLX): MPLX offers investors a big-time income stream. The master limited partnership (MLP) yields nearly 8%. That's multiples above the S&P 500's dividend yield (1.2%).
That big-time yield is only half of the equation. The midstream company is also growing at a very healthy clip. It has grown its distributable cash flow at a 7.7% compound annual rate since 2020, which has helped fuel its increase in distribution at a 10.7% compound annual rate since 2021. It has given investors a more than 10% raise in each of the last three years, including 12.5% in late October.
And MPLX has more growth coming down the pipeline. The company expects to complete an expansion of its BANGL joint venture pipeline early next year. Meanwhile, MPLX and its partners are building the Blackcomb and Rio Bravo pipelines, which should enter commercial service in the second half of 2026. The midstream company also has more natural gas processing plants on track to enter commercial service over the next couple of years.
The MLP has ample financial flexibility to fund these expansion projects while paying its monster distribution. It generated enough cash to cover its payout by a comfy 1.5 fold during the third quarter. Meanwhile, it has a low 3.4 leverage ratio. That gives it ample financial flexibility to approve additional expansion projects or make accretive acquisitions as opportunities arise. It acquired an additional stake in BANGL and bought out some existing joint ventures and a dry gas gathering system earlier this year.
Given its financial flexibility and growth visibility, MPLX should be able to continue increasing its distribution in 2025. As we head toward the new year, that makes it a great midstream stock to buy for income and growth for those comfortable with investing in an MLP that sends its investors a Schedule K-1 federal tax form each year.
Ample fuel to keep the streak alive
Neha Chamaria (Enterprise Products Partners): Enterprise Products Partners is one of the largest midstream companies in the U.S. At 6.5%, it also offers one of the highest yields among large-cap midstream energy stocks. That solid yield is backed by a 26-year streak of annual dividend raises, and there's every chance Enterprise Products will continue to pay bigger dividends in 2025 and beyond, given its resilient business, strong balance sheet, and steady growth in cash flows.
The company has a high credit rating -- A- from at least two agencies -- and exited the third quarter with liquidity (including cash in hand and revolving credit facilities) of $5.6 billion. Its distributable cash flow (DCF) grew by 5% in Q3, encouraging management to increase its dividend by 5%.
Enterprise Products has a solid track record of generating enough cash flows to cover its growing dividends. It has consistently maintained a DCF -- or cash available for distribution to shareholders after maintenance capital expenditures -- above 1.5 times its dividend since 2018.
Enterprise Products has projects under construction worth nearly $6.9 billion, with several, including the Bahia pipeline and a plant each in the Delaware and Midland basins, expected to be complete in 2025. All these projects should drive Enterprise Products' cash flows higher and support bigger dividends, making it one of the top midstream energy stocks to buy as 2024 draws to a close.
