Energy prices were already increasing with the world economy recovering from the pandemic. And the sanctions on Russia by the West exacerbated the supply-side constraints and drove energy prices to record highs. This situation has proved to be a tailwind for domestic oil and gas producers.
Also, natural gas is seen as a low-carbon alternative that would play a pivotal role in helping global economies manage the transition to clean energy and carbon neutrality. According to a report by the International Energy Agency, between 2010 and 2019, coal-to-gas switching saved around 500 million tons of CO2.
The optimism of investors surrounding the industry is evident from the performance of The United States Natural Gas Fund, LP ETF’s (UNG) 104.2% returns over the past six months versus the SPDR S&P 500 Trust ETF’s (SPY) 4.2% loss.
Master limited partnerships (MLPs) are for-profit organizations that operate as publicly traded limited partnerships and are mainly recognized for their unique tax structure. Natural gas MLPs offer low risk exposure to the natural gas business and help generate a steady income through consistent cash distributions.
Thus, natural gas MLPs Hess Midstream L.P. (HESM), Suburban Propane Partners, L.P. (SPH), and Höegh LNG Partners L.P. (HMLP) could be solid investments for risk-adjusted returns.
Hess Midstream L.P. (HESM)
HESM owns, develops, and acquires midstream assets to provide fee-based services. The company has three operational segments: Gathering; Processing and Storage; and Terminaling and Export.
On July 25, 2022, HESM announced a quarterly cash distribution of $0.5559 per Class A share for the quarter ending June, up 1.2% sequentially and 10.3% year-over-year. The increase in quarterly distribution reflects the company’s strong financial position.
HESM pays $2.22 as dividends annually, which yields 7.30% on the current price. Its 4-year average dividend yield translates to 7.81%. Its dividends have increased at a CAGR of 12.2% over the past three years.
On March 29, HESM announced the execution of a definitive agreement providing for the repurchase of $400 million in Class B units. According to Jonathan Stein, Chief Financial Officer, “The unit repurchase transaction is expected to optimize our capital structure to our targeted 3.0x Debt/Adjusted EBITDA for the full year 2022 and provide significant and immediate accretion to our shareholders.”
For the fiscal 2022 second quarter ended June 30, 2022, HESM’s total revenues increased 6.3% year-over-year to $313.40 million. Its income from operations improved 5.2% from its prior-year quarter to $195.30 million, while its net income attributable to HESM doubled to $22 million, up 100% year-over-year. Its EPS improved 13.6% from its prior-year quarter to $0.50.
Analysts expect HESM’s revenue to increase 4.7% year-over-year to $1.26 billion in 2022. The company’s EPS for the ongoing year is expected to grow 18.7% from the prior year to $2.09. The company has topped the consensus revenue estimates in each of the trailing four quarters.
The stock has gained 22% over the past year to close the last trading session at $30.47
HESM’s stable outlook has earned it an overall B rating, equating to Buy in our POWR Ratings system. The POWR Ratings assess stocks by 118 different factors, each with its own weighting.
HESM has an A grade for Momentum and a B for Value and Quality. In the A-rated MLPs – Gas industry, it is ranked #2.
Click here to see the additional POWR Ratings for HESM (Growth, Stability, and Sentiment).
Suburban Propane Partners, L.P. (SPH)
SPH is involved in the retail marketing and distribution of propane, fuel oil, and refined fuels. The company also markets natural gas and electricity in deregulated markets. The company has four operating segments: Propane; Fuel Oil and Refined Fuels; Natural Gas and Electricity; and All Other.
On June 1, SPH announced an agreement with Adirondack Farms in Clinton County, New York, to construct, own, and operate a new biodigester system to convert dairy manure to renewable natural gas. SPH’s portfolio of clean energy investments would expand further with this project.
On May 23, SPH announced an agreement with Iwatani Corporation (TYO: 8088) to collaborate in advancing the adoption of low-carbon alternative energy solutions and promote investments in hydrogen infrastructure and transportation services in the United States.
“We are extremely proud to partner with Iwatani to advance our mutual interests in providing solutions to help decarbonize many sectors of the economy. With the collaboration of Iwatani's market leadership in both the propane and hydrogen markets and our collective commitment to innovation, we are excited to help accelerate the transition to cleaner energy alternatives,” said Michael Stivala, SPH’s President and CEO
For the third quarter ending June 25, 2022, SPH’s revenue increased 26.1% year-over-year to $300.33 million. Its operating income grew 84.6% from its prior-year quarter to $14.77 million. The adjusted EBITDA came in at $29.18 million, up 25.3% year-over-year.
SPH distributed cash of $0.325 per Common Unit to shareholders for the three months ended June 25, 2022. Its current dividend translates to a 7.86% yield annually, while its four-year average dividend yield is 10.78%.
Analysts expect the company’s EPS of $0.99 for the fiscal first quarter (ending December 2023) to grow 191.2% from the same period in 2021. Also, the consensus EPS estimate of $2.60 for the current year represents a 34% improvement year-over-year.
The stock has gained 9.2% year-to-date and 7.8% over the past year to close the last trading session at $16.53.
SPH’s POWR Ratings reflect this promising outlook. The company has an overall B rating, which translates to Buy in our proprietary rating system. The stock has an A grade for Momentum and a B for Sentiment and Quality. It acquired the top spot within the MLPs – Gas industry.
To see additional POWR Ratings for Value, Stability, and Growth for SPH, click here.
Höegh LNG Partners LP (HMLP)
HMLP acquires, owns, and operates floating storage and regasification units (FSRUs), liquefied natural gas (LNG) carriers, and other LNG infrastructure assets under long-term charters. The company operates through two segments: Majority held FSRUs and Joint venture FSRUs.
On May 25, HMLP announced a definitive merger agreement with Höegh LNG Holdings Ltd., under which HMLP will acquire, for cash, all of the outstanding publicly held common units of the Partnership for $9.25 per common unit for a total purchase price of approximately $167.6 million. This is expected to help HMLP retain a more significant share of its profits for reinvestment and growth.
During the fiscal 2022 second quarter ended June 30, 2022, HMLP’s total revenue increased 6.5% year-over-year to $36.94 million. Its operating income came in at $22.29 million, while its net income increased 395% year-over-year to $13.06 million during the same period. The company’s EPS for the quarter stood at $0.28 against a loss of $0.04 per unit during the previous-year quarter.
HMLP distributed cash of $0.01 per unit to stockholders for the fiscal 2022 second quarter ended June 30, 2022. It pays $0.04 as dividends annually, which yields 0.43% on the current price. Its 4-year average dividend yield translates to 12.88%.
Analysts expect revenue for the fiscal year 2022 to come in at $144.02 million, representing an increase of 2% from the last year. The consensus EPS estimate of $1.37 for the current year represents a 3.4% year-over-year growth.
HMLP’s shares have gained 113.4% over the past six months and 104.9% year-to-date to close the last trading session at $9.24.
HMLP’s stable outlook is reflected in its POWR Ratings. The stock also has an A grade for Momentum and a B for Stability and Quality. It is ranked #3 in the same industry.
Beyond what we’ve stated above, we have also given HMLP grades for Sentiment, Value, and Growth. Get all HMLP ratings here.
HESM shares were unchanged in after-hours trading Friday. Year-to-date, HESM has gained 13.80%, versus a -14.03% rise in the benchmark S&P 500 index during the same period.
About the Author: Mangeet Kaur Bouns
Mangeet’s keen interest in the stock market led her to become an investment researcher and financial journalist. Using her fundamental approach to analyzing stocks, Mangeet’s looks to help retail investors understand the underlying factors before making investment decisions.
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