The price of crude oil is down about 2% in the United States year-to-date, with WTI crude now at $70 per barrel. At the same time, the Federal Reserve just cut its benchmark interest rate by 0.75 percentage points, which could boost commodity prices going forward. Economists widely believe additional rate cuts are in store.
As a result, now is a good time to look through the energy sector for potential bargains. Valuations have become more attractive for many of the world’s top oil producers. In addition, many energy stocks continue to pay high dividends to shareholders.
These 3 energy stocks are attractive to income investors due to their high yields.
BP plc (BP)
BP is one of the largest oil and gas corporations in the world based on its $89 billion market cap. It is a fully integrated company and operates in two segments: upstream and downstream (mostly refining).
In late July, BP reported (7/30/24) financial results for the second quarter of fiscal 2024. Refining margins contracted significantly off record levels but the price of oil improved sequentially. As a result, earnings-per-share edged up 3%, from $0.97 to $1.00, and exceeded the analysts’ consensus by $0.09. BP has beaten the analysts’ consensus in 10 of the last 14 quarters and has reduced its debt in 15 of the last 17 quarters.
It also raised its dividend by 10% and reiterated that its dividend is sustainable even at a Brent price of $40. Moreover, it maintained its share repurchase program of $14 billion until the end of 2025. This program can reduce the share count by 16% at the current stock price. BP also has a cost-cutting program that will save $2 billion per year from 2027.
We view the current dividend as fairly safe, particularly given the drastic reduction of the debt of BP in the last three years. BP stock currently yields 6.2%.
Kinder Morgan (KMI)
KMI is a leading midstream energy company that owns North America's largest CO2 transportation, independent refined products transportation, independent terminal, and natural gas transmission businesses. As a result of its immense scale, it transports approximately 40% of the United States’ natural gas.
Given that over 90% of its EBITDA is resistant to short-term commodity price movements, it enjoys a very stable cash flow profile. Its resistance to swings in the energy industry is further enhanced by the fact that the vast majority of its counterparties are investment grade.
Kinder Morgan, Inc. (KMI) reported strong third-quarter 2024 financial results, marked by a 17% increase in earnings per share (EPS) compared to the same period in 2023. The company posted a third-quarter EPS of $0.28, up from $0.24 last year, while adjusted EPS remained flat at $0.25. Distributable cash flow (DCF) per share also stayed unchanged at $0.49.
Kinder Morgan's net income reached $625 million, compared to $532 million in Q3 2023, and its adjusted EBITDA grew by 2% to $1.88 billion. The board of directors approved a quarterly cash dividend of $0.2875 per share ($1.15 annualized), a 2% increase over Q3 2023, payable on November 15, 2024, to shareholders of record as of October 31, 2024.
Given its solid investment grade credit rating, significant liquidity, and leverage ratio that is now below its long-term target, KMI’s dividend looks secure. Its forward dividend yield of 4.7% makes it a very attractive high yield energy stock.
ONEOK Inc. (OKE)
ONEOK is an energy company that engages in the gathering and processing of natural gas, as well as a natural gas liquids business and natural gas pipelines (interstate and intrastate). ONEOK also owns storage facilities for natural gas. ONEOK is headquartered in Tulsa, Oklahoma, and was founded in 1906.
ONEOK reported its second quarter earnings results on August 5. The company reported that it generated revenues of $4.9 billion during the quarter, which was 31% more than the revenues that ONEOK generated during the previous year’s quarter.
The revenue movement compared to the prior year’s quarter was influenced by commodity price movements, while the Magellan Midstream takeover also impacted revenues. ONEOK’s adjusted EBITDA was up nicely compared to the previous year’s period, rising by 65% to $1.62 billion. EBITDA also was up on a sequential basis, although less compared to the year-over-year growth rate.
ONEOK has reduced its organic growth spending to some degree, as this will allow ONEOK to pay down debt in the coming years. The company is forecasting EBITDA at $6.2 billion for the current year, representing a close to 20% increase versus 2023.
ONEOK has a secure dividend at the current payout level. OKE stock currently yields 4.2%.
Disclosure: No positions in any stocks mentioned
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Bob Ciura has worked at Sure Dividend since October 2016. He oversees all content for Sure Dividend and its partner sites. Bob received a Bachelor’s degree in Finance from DePaul University, and an MBA with a concentration in Investments from the University of Notre Dame.