The deep drop in oil prices over the past few years has weighed on the entire energy industry. The downturn has even affected infrastructure companies, even though most generate relatively stable cash flow since long-term fee-based contracts typically underpin the bulk of their assets. That's evident by looking at their stock prices, which have plunged over the past few years.
That sell-off, however, has opened the door for investors to pick up some top companies at bargain prices, with the following three stocks standing out given their sub-$20 prices:
Here's a closer look at why these low-priced energy stocks could fuel top-tier returns for investors who buy today and hold on tight as the energy market slowly recovers.
A beaten-down pipeline company
Energy Transfer owns and operates one of the largest and most diversified portfolios of energy-infrastructure assets in the country. However, despite that leading position, the company's unit price plunged a whopping 63% over the past three years. While the impact of lower oil and gas prices on the company's cash flow played a role in that decline, it hasn't helped that the company has a weak balance sheet and has suffered through several operational missteps over the past year.
Still, the company started turning the corner last quarter after its cash flow rebounded thanks to higher energy prices and recent growth projects entering service. While the company still has some issues to overcome, including finishing several controversial expansion projects and continuing to improve its balance sheet, it's heading in the right direction. In fact, the company believes that those projects will not only support its jaw-dropping current yield but should also allow it to boost the payout by a low-double-digit annual rate over the near-term.
Back on solid ground
Kinder Morgan operates the largest natural gas pipeline network in the country, and it's also the industry leader in petroleum products transportation and independent storage. But while these assets throw off stable cash flow, it hasn't stopped investors from bailing on its stock, which has fallen more than 50% over the past three years. One of the fuels of that sell-off was the weakened state of the company's balance sheet during the early years of the downturn.
However, after cutting its dividend, selling assets, and securing outside capital to help finance a portion of its growth projects, Kinder Morgan's financials are back on solid ground. As a result, the company recently announced that it will raise its dividend 60% next year and by 25% in both 2019 and 2020, while also planning to repurchase up to $2 billion in stock. While shareholders initially cheered the move, the stock has started falling backward because of worries about the company's ability to build its largest growth project, the Trans Mountain Pipeline expansion in Canada, which has come under intense opposition. However, that sell-off represents what could be the last opportunity to buy the stock for less than $20 a share, given the growth it has coming down the pipeline even without that project.
Another stumble but the portfolio is there
While both Energy Transfer and Kinder Morgan operate diversified businesses, Plains All American Pipeline's focus is on oil-related infrastructure. However, because of that oil focus, the company has been harder hit by the market downturn. Worse yet, it has yet to start turning the quarter and recently warned that its full-year earnings would come in below expectations and that it might need to cut its distribution again. As a result, the company's unit price has plunged 35% so far this year.
However, despite those stumbles, Plains All American Pipeline appears to have a bright future once it can get back on solid ground. Fueling that view is the company's compelling position in the red-hot Permian Basin, where it's rapidly expanding its network to meet producer demand. The company believes that the projects it has in development in the Permian and elsewhere can boost its fee-based earnings by 15% next year, which should finally turn around its sinking financial situation. Meanwhile, with plenty more projects coming down the pipeline, Plains has the potential to deliver robust earnings growth in the coming years as these expansions enter service.
Higher risk but for a greater reward
These three pipeline stocks all have one thing in common, which is that each has struggled during the energy market downturn in part because of weaker balance sheets. That's why they sell for less than $20 apiece these days and offer such jaw-dropping income potential. While risk remains in all three names, each has massive upside as energy markets and their financial situations improve, which suggests that investors who are willing to take on the risk and buy below $20 could score big returns.
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Matthew DiLallo owns shares of Kinder Morgan and has the following options: short January 2018 $30 puts on Kinder Morgan, long January 2018 $30 calls on Kinder Morgan, and short December 2017 $19 puts on Kinder Morgan. The Motley Fool owns shares of and recommends Kinder Morgan. The Motley Fool has a disclosure policy.