However, not all stocks are down thus far in 2022. Three notable winners year-to-date are Enbridge (ENB 2.60%), Marathon Oil (MRO 7.44%), and Energy Transfer (ET 3.66%). Here’s a look at what’s fueling the surprisingly strong returns of these energy stocks.
Cashing in by charging fees
Reuben Gregg Brewer (Enbridge): The energy sector has done quite well in 2022 thanks to rising oil prices, and it has carried Canada’s Enbridge along for the ride. So far this year, the North American midstream giant is up around 11% while the S&P 500 Index is down 16%. That’s not bad, but there’s a major difference between Enbridge and the oil drillers that make up much of its clientele.
You see, Enbridge owns the assets that move oil and natural gas from the places where they are extracted to the places where they are refined, stored, and consumed. It charges set fees based on volume for these services, meaning that, to Enbridge, the demand level for energy is significantly more important than the market prices of oil or natural gas. Because of this, its cash flows are more resilient and consistent than those of drillers, which tend to rise and fall along with commodity prices.
Just how strong is Enbridge’s business? Over the next few years, management expects to generate as much as $2 billion in excess cash flow over its current investment plans and expected dividend payments. It can use that cash to support the dividend, acquire assets, build from the ground up, or buy back stock. (Share buybacks are the plan in 2022.) But, from a conservative investor’s point of view, that excess cash flow should probably be seen as a huge cushion to protect the dividend against adversity like market volatility or an oil price crash.
At the current share price, the stock offers a fat 5.8% dividend yield. And to add further to the allure here, note that Enbridge’s annual dividend-raising streak of 27 years would have earned it a spot on the Dividend Aristocrats list if it were an S&P 500 component. It’s not part of that index, but that doesn’t make its track record of payout hikes any less impressive.
This oil stock is having a big year
Matt DiLallo (Marathon Oil): Shares of oil producer Marathon Oil have rocketed more than 50% higher this year. A big factor fueling that rally is the surge in crude oil prices. Due to unresolved supply-and-demand imbalances and geopolitical turmoil, oil has jumped nearly 40% this year to over $100 a barrel.
While higher oil prices benefit all oil producers, Marathon is one of the few enjoying the full impact of this price rally. That’s because the company has very little of its production hedged this year, giving it nearly uncapped exposure to higher oil prices.
As a result, it’s generating a gusher of free cash flow. Adjusted free cash surged to $940 million during the first quarter, giving it a windfall to return to shareholders. One way Marathon is rewarding investors is with its dividend. It increased the payout by another 15%. That’s its fifth consecutive increase, pushing the cumulative total to 167% since the beginning of 2021. The oil producer also repurchased $592 million of its stock. Since October, it has repurchased $1.6 billion in stock, reducing its outstanding share count by 11% and helping drive the stock price higher.
Assuming crude prices remain above $100 a barrel, Marathon expects to produce over $4.5 billion in adjusted free cash flow this year. That led the company to increase its share repurchase authorization to $2.5 billion, in line with management’s commitment to return at least 40% of its excess cash to shareholders. Those additional share repurchases should help fuel further strong returns for Marathon Oil’s shareholders amid what could remain a volatile stock market.
A 7.5%-yielding stock that’s crushing the market
Neha Chamaria (Energy Transfer): The S&P 500 has lost nearly 17.7% in value year to date, as of this writing. Energy Transfer’s stock, meanwhile, has gained 30% so far in 2022. But there’s a lot more to the company’s rally than just today’s unusually high oil and natural gas prices.
With a pipeline network spanning nearly 120,000 miles, Energy Transfer is among the largest midstream companies in the U.S. In its most recent quarter, the company grew its revenue by 21% year over year, and generated enough distributable cash flow to cover its distributions by 3.36 times. (For master limited partnerships like Energy Transfer, distributions are their variation on dividends, and have the added benefit of being tax-deferred for the recipient until they sell their shares.) The company even increased its distribution payout by nearly 31% during the first quarter, and at the current share price, its stock yields a hefty 7.5%.
I wouldn’t be surprised to see Energy Transfer deliver more strong results in the coming quarters. It is expanding its pipeline aggressively while trying to unlock value from its recent acquisition of Enable Midstream. It’s also selling a 51% interest in Energy Transfer Canada, which should help it reduce its debt by $450 million. Meanwhile, the company has also secured four liquid natural gas supply deals for its proposed Lake Charles export terminal, a project that has been in limbo but could now finally advance thanks to those deals.
Long story short, there’s a lot happening at Energy Transfer, including a strong development pipeline that should help the company grow its cash flow — and its distributions. Investors have recognized the potential, which is why they’ve bid Energy Transfer stock higher even in this choppy market. However, based on its pipeline of projects and focus on growth, Energy Transfer could rally even higher.