Oil prices surged over 4% on Monday amid concerns about the potential spread of military conflicts beyond Gaza, driven by clashes between Israel and Hamas. On Wall Street, energy shares climbed, with the S&P 500 energy index closing 3.5% higher.
In this dynamic energy landscape, investors could consider investing in quality energy stocks USA Compression Partners, LP (USAC), Western Midstream Partners, LP (WES), and CrossAmerica Partners LP (CAPL), which are generating significant buzz. These companies also pay stable dividends.
Global oil demand is reaching record levels, mainly due to increased summer air travel, higher oil usage in power generation, and increased petrochemical activity in China. The US Energy Information Administration's Oil Market Report (OMR) predicts a year-over-year growth of 2.2 million barrels per day, reaching 102.2 million barrels per day in 2023, with China contributing over 70% of this increase.
Moreover, the electrification of the transport and heating sectors continues to accelerate globally, with record numbers of sales of electric vehicles and heat pumps, boosting the energy industry. Last year, the U.S. generated about 4.24 trillion kilowatt hours (kWh) of electricity, with approximately 40% from natural gas, 22% from renewables, 20% from coal, 18% from nuclear, and less than 1% from petroleum.
In addition, natural gas production and demand will rise to record highs in 2023, the EIA said recently in its Short Term Energy Outlook (STEO).
Additionally, according to EIA’s Annual Energy Outlook 2023, the U.S. natural gas production is projected to increase by 15%, and LNG exports will surge by 152% between 2022 and 2050. Also, natural gas production is expected to reach 42.1 trillion cubic feet (Tcf) by 2050. Continued global demand for natural gas makes it economically viable to establish additional LNG export facilities in the United States.
With these favorable trends in mind, let's delve into the fundamentals of the three MLPs – Oil & Gas stock picks, beginning with the third choice.
Stock #3: USA Compression Partners, LP (USAC)
USAC offers compression services to oil companies and independent producers, processors, gatherers, and natural gas and crude oil transporters.
On August 4, 2023, USAC paid a quarterly dividend of $0.525 per common unit, which corresponds to an annualized distribution rate of $2.10 per common unit. This translates to a yield of 8.15% on the current market price. Its four-year average dividend yield is 14.08%.
USAC expects a net income range of $75 million to $95 million, an adjusted EBITDA range of $490 million to $510 million, and a distributable cash flow range of $260 million to $280 million in the fiscal year 2023.
USAC’s revenue increased 20.7% year-over-year to $206.92 million in its fiscal second quarter, ended June 30, 2023. Its operating income rose 21.3% from the previous-year quarter to $51.43 million. Its net income per share amounted to $0.11, compared to a loss of $0.03 in the previous-year quarter. Moreover, the company’s adjusted EBITDA improved 18.6% year-over-year to $125 million.
Analysts expect USAC’s revenue to increase 18.6% from the previous year to $835.90 million in the fiscal year 2023. Its EPS is likely to amount to $0.30 in the current year. The company has exceeded the revenue estimates in each of the trailing four quarters, which is impressive.
The stock has gained 43.4% over the past year and 17.1% over the past month to close its last trading session at $25.59.
USAC’s POWR Ratings reflect this promising outlook. The stock has an overall rating of B, equating to a Buy in our proprietary rating system. The POWR Ratings are calculated by considering 118 different factors, with each factor weighted to an optimal degree.
USAC has an A grade for Growth and Momentum and a B for Stability and Quality. It is ranked #9 of the 26 stocks in the A-rated MLPs – Oil & Gas industry.
To see USAC’s additional POWR Ratings for Value and Sentiment, click here.
Stock #2: Western Midstream Partners, LP (WES)
WES and its subsidiaries acquire, own, develop, and operate primarily in the United States. The company manages assets in Texas, New Mexico, the Rocky Mountains, and North-central Pennsylvania.
On September 27, WES announced a $600 million offering of 6.350% senior notes due in 2029. The net proceeds will be used for various purposes, including funding a pending acquisition and covering related costs.
On September 5, WES entered into an agreement to acquire Meritage Midstream Services II, LLC, for $885 million in an all-cash deal. Meritage, based in Denver, Colorado, operates a natural gas gathering and processing business in Wyoming's Powder River Basin.
The acquisition is expected to be completed in the fourth quarter of 2023, subject to regulatory approvals. Meritage's assets include pipelines, natural gas processing capacity, and an NGL pipeline, supported by over 1.4 million dedicated acres. The transaction will enhance WES's position in the Powder River Basin and diversify its customer portfolio.
While WES’ four-year average dividend yield is 11.52%, its current annual dividend of $2.25 translates to an 8.16% yield on the current market price.
WES has updated its fiscal year 2023 guidance based on the latest production forecasts from its producer customers. The revised guidance includes Adjusted EBITDA ranging between $1.95 billion and $2.05 billion, total capital expenditures of $700 million to $800 million, and free cash flow between $900 million and $1 billion.
WES’ fee-based service revenues rose marginally year-over-year to $661.51 million for the fiscal second quarter ended June 30, 2023. Its total operating expenses declined 15.7% from the previous-year quarter to $443.86 million. Also, the company reported net income of $252.92 million and $0.64 per share.
WES’ revenue and EPS are expected to come in at $799.46 million and $0.64 in the to-be-announced quarter that ended September 2023.
Over the past year, the stock has gained 12.1% to close the last trading session at $27.66. It has soared 6.4% over the past month.
WES’ strong fundamentals are reflected in its POWR Ratings. The stock has an overall B rating, which indicates a Buy in our proprietary rating system.
WES has an A grade for Quality and a B for Momentum and Stability. It is ranked #5 in the same industry.
Click here to access WES’ additional POWR Ratings for Growth, Value, and Sentiment.
Stock #1: CrossAmerica Partners LP (CAPL)
CAPL engages in the wholesale distribution of motor fuels, operation of convenience stores, and ownership and leasing of real estate used in the retail distribution of motor fuels worldwide. It operates in two segments, Wholesale and Retail.
On August 11, 2023, CAPL paid a quarterly distribution of $0.5250 per unit attributable to the second quarter of 2023 (annualized $2.10 per unit). While the company’s four-year average dividend yield is 11.61%, its current annual dividend yields 10.07% on the prevailing market price.
During the fiscal second quarter that ended June 30, 2023, CAPL’s operating income increased 32.2% year-over-year to $27.85 million. The company’s gross profit rose 9.9% year-over-year to $97.72 million. In addition, its adjusted EBITDA increased 2% year-over-year to $42.20 million.
CAPL’s EPS and revenue for the fiscal year 2023 are expected to come in at $0.89 and $4.53 billion, respectively. It also topped the consensus revenue estimates in each of the trailing four quarters.
Over the past three months, the stock has gained 13.4% to close the last trading session at $21.32. The stock has returned 9.5% over the past month.
CAPL’s robust prospects are reflected in its POWR ratings. The stock has an overall rating of A, which equates to a Strong Buy in our proprietary rating system.
It has an A grade for Sentiment and a B for Stability. It is ranked first within the same industry.
In addition to the POWR Ratings highlighted above, one can access additional CAPL for Growth, Value, Momentum, and Quality ratings here.
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WES shares were trading at $27.69 per share on Wednesday morning, up $0.03 (+0.11%). Year-to-date, WES has gained 10.66%, versus a 14.90% rise in the benchmark S&P 500 index during the same period.
About the Author: Kritika Sarmah
Her interest in risky instruments and passion for writing made Kritika an analyst and financial journalist. She earned her bachelor's degree in commerce and is currently pursuing the CFA program. With her fundamental approach, she aims to help investors identify untapped investment opportunities.
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