Midstream stocks are often attractive to investors seeking steady income streams, as they typically offer higher dividend yields than other sectors. With the recent volatility in crude oil prices and the ongoing shift toward renewable energy sources, many on Wall Street are turning their attention to midstream stocks as a more stable investment option.
While some midstream companies are involved in transporting and storing various types of energy products, such as crude oil and natural gas liquids, others specialize in natural gas pipelines, which are seen as a key part of the transition to a cleaner energy future. As such, midstream stocks have become an increasingly popular choice for investors seeking both income and long-term growth potential.
Investing in oil and gas midstream stocks can be profitable, but it requires careful research.
What is the Midstream Sector?
The midstream sector is a part of the oil and gas industry that deals with transporting, storing, and processing oil and gas products. It includes companies that operate pipelines, storage facilities, and terminals that move crude oil, natural gas, and refined petroleum products from the production site to refineries, processing plants, and distribution centers.
The midstream sector plays a crucial role in the oil and gas supply chain, connecting producers with end-users and enabling the movement of these products across long distances.
Without the midstream sector, oil and gas would not be able to reach the market and power our economy.
Investing in Midstream Stocks
Some companies operating in the midstream sector include:
MPLX LP (NYSE: MPLX)
Energy Transfer LP (NYSE: ET)
Enterprise Products Partners LP (NYSE: EPD)
Enbridge Inc (NYSE: ENB)
TC Energy Corporation (NYSE: TRP)
Kinder Morgan Inc (NYSE: KMI)
Williams Companies Inc (NYSE: WMB)
Cheniere Energy Partners LP (NYSEAMERICAN: CQP)
ONEOK Inc (NYSE: OKE)
Pembina Pipeline Corporation (NYSE: PBA)
The US exports a lot of liquified natural gas (LNG), which is key to the energy transition. For that reason, some believe exports will increase in the years to come.
There are not many options for companies that solely focus on exporting LNG besides Cheniere. However, NextDecade (NASDAQ: NEXT) and Tellurian (NYSEAMERICAN: TELL) are two startups that plan to construct LNG facilities in the coming years.
Meanwhile, pipeline giants Williams Companies and Kinder Morgan have increasing exposure to alternative energy. Alternative energy initiatives reduce a company's emissions footprint, which increases its appeal to investors in ESG funds.
There are many midstream stocks to choose from, but the best midstream stocks typically have strong financials, a diverse portfolio of assets, and a history of reliable dividend payouts due to their stable business models.
Before jumping in and investing in any of these midstream stocks, it’s important to do some due diligence.
Analyze the Financial Health of Midstream Stocks
When considering investing in a midstream oil and gas company, there are several financial metrics you should evaluate to get a sense of its financial health and potential for growth.
Here are some key financials to look at:
Revenue
Profits (Net Income)
Cash flow
Debt levels
Capital expenditures
Dividend payouts
By analyzing these financial metrics, you can get a good understanding of the company's financial health and potential for growth.
It's important to consider these factors in the context of the broader industry and market conditions to make informed investment decisions.
Examine the Company’s Assets
Evaluate the company's pipeline and storage infrastructure, which are key drivers of revenue for oil and gas midstream firms. A well-maintained and efficient infrastructure can provide a competitive advantage, as it allows the company to move products more efficiently and at a lower cost compared to competitors.
Investors should also evaluate the geographic footprint of the company. Many of the most promising pipeline stock opportunities exist in North America.
Also, look at its contracts with producers and other customers to understand its revenue streams and the stability of its business.
Consider Industry Trends
When evaluating midstream companies for investment, it is essential to consider broader industry trends. One of the most critical trends to look at is changes in oil and gas prices.
The price of oil and gas has a significant impact on the revenue and profitability of midstream companies. An increase in oil and gas prices can lead to increased demand for these products, which, in turn, can increase the need for midstream infrastructure to transport and store them.
Regulatory developments also play a crucial role in the energy industry, and, therefore, impact midstream companies. Changes in regulations, such as environmental policies, safety standards, or windfall taxes, can significantly impact the costs, operations, and profitability of midstream companies. You should watch how midstream companies are adapting to new regulations and their potential impact on the company's financials.
Moreover, shifts in energy demand can also affect midstream companies. A recession or the transition towards renewable energy sources may reduce demand for oil and gas products. This shift in energy demand may reduce the need for midstream infrastructure and result in decreased revenue for midstream companies.
Evaluate Management
Assess the quality of the company's management team, including their track record and experience in the industry. Consider their strategy and whether they have a clear plan for growth and value creation.
Reading a company’s annual report, tuning in to an earnings update or reading the transcripts can give you insight into the way management treats its shareholders and drives its business forward.
Monitor the Company's Performance
Keep track of the company's performance over time, including changes in revenue, earnings, and stock price. Pay attention to any significant developments, such as acquisitions or divestitures, and reassess your investment thesis as necessary.
By taking all these factors into account, investors can make informed decisions about which midstream energy stocks offer the best potential for long-term growth and high dividend returns in the dynamic world of oil and natural gas.
Is there a Midstream Energy Company ETF?
Yes, the Alerian Midstream Energy Dividend UCITS ETF (BIT: MMLP) is focused on midstream oil and gas stocks. The objective of the fund is to offer diversified investment exposure to companies in the energy sector that are engaged in the processing, transportation, and storage of natural gas, oil, and natural gas liquids in the Canadian and US markets.
The fund's strategy involves tracking a dividend-weighted index that focuses on the liquid, dividend-paying portion of the energy infrastructure market in Canada and the US, which includes MLPs and C-Corps. However, it’s important to note the fund also includes other US stocks unrelated to energy.
Navigating the Pipeline
Overall, investing in oil and gas midstream stocks requires a careful evaluation of the company's financials, assets, and management team, as well as broader industry trends.
Capital expenditure can be high in midstream stocks, but energy is integral to the global economy, and midstream stocks are integral to the energy industry. By taking a thoughtful and analytical approach, you can identify high-quality midstream companies that have the potential to generate strong returns over the long term.
What's Next for Your Investment Portfolio?
Diversifying it with oil and gas stocks may be worth considering. The industry faces the challenge of finding high-quality oil and gas reserves, which makes investing in exploration and production (E&P) stocks particularly intriguing. To deepen your understanding and expand your investment strategies, consider exploring our investing guides on topics such as buying OTC and TSX stocks, finding investment opportunities, and the benefits of investing in gold.
