Oil prices have been all over the map this year. Overall, crude oil is up 20% since it has begun to recover from a deep plunge at the end of 2018, although it is well off the highs. This volatility has harmed the energy stocks, many of which have underperformed the S&P 500 this year.
However, some of the sector's weakest performance does not make much sense. Leading MLPs Energy Transfer (NYSE: ET) MPLX (NYSE: MPLX) and Plains All American Pipeline (NYSE: PAA) has for example, all lost value this year, even though their earnings have increased sharply. Because of this, they all look like bargains in November, especially for income-seeking investors.
Scratching the bottom of the barrel [1
9659009] The energy transfer units have fallen another 6% this year. There is a sharp decline considering that the company is on track to increase revenues by another 15%. Because of this, Energy Transfer's fall in value has fallen to a share that is lower than 8.5 times expected earnings. This is well below the average of the professional group at about 10 times earnings.
That decline has also pushed MLP's distribution return up to an eye-catching 9.9%. What is even more impressive about this payout is that Energy Transfer is currently generating enough money to cover it with a super-comfortable 2.0 times.
It provides the flexibility to use the excess cash flow to pay down debt and invest in expansion projects, which set it up to continue to grow in 2020. In the meantime, the company's improved balance sheet recently enabled a needle acquisition to strengthen its presence in the oil market. Given Energy Transfer's compelling mix of income, growth and value, patient investors could reap significant rewards in the coming years.
Tumbling for no reason
MPLX's unit price has fallen about 16% this year. This decline comes despite the company's cash flow per unit rising about 19% through the third quarter compared to the previous year. The driving force for the growth is the company's expansion projects as well as the acquisition of sibling MLP Andeavor Logistics.
The increasing cash flow has allowed it to continue to increase distribution, up 6.3% over the past year. Add it to the slide in the unit price, and MPLX now gives an alluring 10.7%. This payout is on a fairly stable basis since the mid-stream company has covered it with cash flow by 1.54 times this year. Meanwhile, it has a solid balance with a leverage ratio right at the comfort level of most MLPs.
Due to the solid financial profile, MPLX has the financial flexibility to continue investing in new projects. A notable recent addition is the investment in the Wink to Webster oil pipeline, which should start in 2021. Add to that the other projects, and MPLX should have plenty of fuel to continue to increase its already sky-high payout or use the step-by-step cash flow to buy back some of their dirt-cheap devices.
The performances do not match
Plains All American Pipeline has a banner year. MLP, which is focused on oil pipelines, has beaten the forecast every quarter this year. As it is now on track to increase revenue by around 15% year over year. However, despite its strong performance, Plains All American's units have plunged around 7% of value this year. That decline, along with a 20% increase in distribution, has pushed MLP's return up to 7.7%. This payout is on solid ground as the company is currently on track to cover it with cash at comfortable 2.06 times this year. Add to that the rock-solid balance, and it has plenty of financial flexibility to invest in expansion projects.
Plains All American Pipeline currently has several growth projects underway, including management of the construction of Wink to Webster. Most of the projects should come into line at the end of 2020 to 2021, and significantly increase cash flow. This will give it even more money to return to investors over the already attractive distribution.
Revenue and Growth for a Value Price
All oil price volatility this year seems to weigh on the values of oil-focused MLPs, although it has minimal impact on their cash flow. Because of this, Energy Transfer, MPLX and Plains All American are now trading at dirt-cheap prices. Add the well-supported revenue streams to their growth prospects, and these energy companies can potentially make big gains for patient long-term investors buying this month.