Targa Resources provided one of several bright spots among pipeline earnings last week with a 50% increase in their dividend planned for next year. Their cashflows are increasing strongly. JPMorgan projects a Distributable Cash Flow (DCF) yield of 14% for this year, rising to 16% in 2024 and almost 18% in 2025. The new $3 per share dividend yields 3.3%. The company also bought back $132MM in stock during 3Q. Both JPMorgan and Wells Fargo see around 25% upside over the next year.
Irrational exuberance has been missing from midstream energy infrastructure for almost a decade. 25% 12 months’ upside on a stock that’s returned 32% over the past year may remind grizzled MLP veterans of 2014, when the structurally flawed Alerian MLP ETF (AMLP) peaked. It currently trades at half its value back then, missing stocks like TRGP which long ago shed the MLP structure in search of a broader investor base. The years that energy has been out of favor have served to improve the valuations of TRGP and its peers. Leverage of 3.6X Debt:EBITDA this year is projected to decline to 3.3X next year. Along with Its dividend coverage and buybacks, TRGP reflects the lower risk profile and improved shareholder returns that continue to propel the sector higher.
Energy Transfer (ET), widely owned among financial advisors we talk to, has been repaying that faith with a 26% total return YTD. 3Q23 EBITDA beat expectations handily by 7%, and they raised full year guidance (midpoint went from $13.25BN to $13.55BN). Management is still negotiating with the US Department of Energy (DoE) over a permit extension for their Lake Charles LNG project. They reported that some potential buyers have been lobbying the DoE directly to let it go ahead. It’s unclear why the DoE won’t extend an approval they previously issued. But they should. Exporting cheap US natural gas will improve energy security for our friends and allies around the world as well as offering a cleaner substitute to coal for power generation.
Cheniere expects to be at the high-end of guidance for 2023 and more importantly now expects first LNG production from Train 1 of Corpus Christi Stage 3 by the end of next year, six months ahead of prior expectations. This creates the potential for their marketing arm to sell into an elevated spot natural gas market in 2025 before contracts start.
Other good news came from MPLX which beat EBITDA expectations, Pembina who raised full year guidance by 4%, Western Gas who repurchased another 5.1 million shares from Occidental and Enlink who spent $50MM buying back shares during 3Q23.
Oneok raised 2023 guidance and expressed optimism about identifying further synergies from their recent acquisition of Magellan Midstream. Equitrans, owner of the perennially delayed Mountain Valley Pipeline (MVP), said they expect most construction to be completed by year’s end and to be in service by January.
It was another solid quarter of earnings to soothe the purchase decisions of investors committing capital to the sector.
Your blogger spent last week traveling across the southeast US seeing clients. Stops were made in Dallas, Houston, New Orleans and Miramar Beach, FL. As always, it was thoroughly enjoyable to reconnect with old friends and make some new ones. The pipeline sector’s fundamentals have been relentlessly positive. This continues to move stock prices higher which is overpowering skepticism around traditional energy.
Houston’s Red Lion British Pub serves that quintessentially English dish – Chicken Tikka Masala. Fellow Brit Geoff Lanceley and I both enjoyed it. This Indian dish is now more popular than fish and chips in the UK.
In New Orleans I saw Keith Laterrade, a long-time investor with us who in the late 1990s played professional (English) football in England. This included one game as goalkeeper for current Premier League champions Manchester City. He progressed substantially farther than me in the world’s favorite sport, and we always compare notes on the latest results before moving on to pipelines.
Keith suggested dinner at Bayona which is owned by his long-time client Regina Keever in the French quarter just a block from Bourbon Street. It must be New Orleans dining at its best. If you can visit, you won’t be disappointed. Keith doesn’t just manage money for clients, he supports them across a wide range of financial interests. He’s currently helping Ms Keever who, after 30 years of providing a high-end dining experience is looking to sell.
If you’re interested in buying a restaurant at the top of its game, let me know and I’ll connect you with Keith.
Miramar Beach in Florida’s panhandle is known as the Emerald Coast because of the color of the water which beautifully offsets the white sandy beaches. Long-time client Rob Coletta suggested Bijoux for dinner. This similarly beat expectations, just like the pipeline companies that occupied our convivial dinner together.
Throughout my meetings everyone was pleased with how the fundamentals are playing out and surprised that retail buyers have not yet warmed to the sector. Although our investor base tends to vote Republican, there is an appreciation if not gratitude towards the climate extremists whose opposition to new projects has improved free cash flow, helping create the positive circumstances for today’s investors in reliable energy. My admonition to “Hug a Climate Extremist” always draws a smile.
It’s not just tongue in cheek. By investing in natural gas infrastructure, we’re supporting the source of America’s biggest success in reducing CO2 emissions by displacing coal. By investing in LNG export terminals, we’re helping provide the same opportunity to buyers around the world. Practical solutions are the best.
We have three have funds that seek to profit from this environment:
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