TProduction companies in the energy sector profit from the trade in commodities – oil and gas – which are always in demand. They have high overheads, but they also have a ready market for the product and therefore strong cash positions.
Using this strong cash flow, companies have followed two strategies to increase their shares; First, they are simply buying back stocks to support the price. And second, they pay high dividend yields, providing investors with a steady stream of income from stocks. The average dividend yield in the energy sector is up to 4%, nearly double the average S&P 500 yield of 2.1%.
With that in mind, we’ll take a closer look at two Strong Buy energy stocks, according to the analyst community, which pay well above-average dividends – giving investors the gift of a 7% return. Using the TipRanks database, we’ve researched the details and will flesh them out with recent analyst comments.
Kimbell Royalty Partners (KRP)
We’ll start by taking a look at Kimbell Royalty Partners. This company combines both real estate investment and energy investment; Kimbell invests in land, specifically in mining rights to acres of land in known petrochemical basins. The company’s portfolio holds more than 13 million acres in 28 states and includes properties in all of the major onshore oil and gas basins of the United States. Kimbell has more than 97,000 wells, with its largest presence – some 41,000 active wells – in the Permian Basin of Texas.
In 2021, Kimbell saw his profit situation shift from large losses to small gains. From 4Q20 to 1Q21, the EPS loss fell from $ 1.66 to just 2 cents, and in the second quarter, the company reported a modest EPS gain of 4 cents. At the top of the line, revenues hit a low in 2Q20 and have been rising steadily since. Second quarter revenues from oil, gas and natural gas liquids were $ 39 million, the highest in more than two years.
Rising income and profits supported a return to high dividends. Management was forced to cut dividend payments at the onset of the corona crisis – but that was less of a setback than it seemed, as the company has a habit of adjusting dividend payments to keep them going. in accordance with income. Since the second quarter of last year, Kimbell has increased the dividend three times. The current payment, of 31 cents per common share, cancels out to $ 1.24 and gives a return of 7.41%.
Covering Kimbell for Raymond James, analyst John Freeman notes that the dividend is a key factor.
“For the second quarter, KRP declared a dividend of $ 0.31 / share, an increase of approximately 15% q / q, amounting to 75% of distributable cash flow (the remaining 25% is used for reduce debt). We expect this ratio to remain constant through 2H21, with projected 3Q / 4Q distributions of ~ $ 0.27 / ~ $ 0.28 per share, respectively. This equates to a dividend for fiscal 2021 of approximately $ 1.13 / share, which equates to a dividend yield of approximately 11%! Keep in mind that this dividend is tax-exempt … Hard to imagine that there are many better opportunities than picking up stocks with a tax-exempt return of 11% +, “Freeman said.
These comments confirm Freeman’s strong buy rating, and his price target of $ 20 implies upside potential of around 55% year-on-year. (To look at Freeman’s record, Click here)
Wall Street generally agrees with Freeman’s point of view here, as evidenced by the Strong Buy consensus rating of the stock. Kimbell shares are priced at $ 12.93 and the average price target of $ 16.50 gives a 28% rise for the coming year. (See the analysis of KRP stocks on TipRanks)
Hess Midstream Operations (HESM)
Next, Hess Midstream, one of the many companies that lives in the so-called midstream of the energy industry, transporting oil, natural gas, natural gas liquids and refined petroleum products from wellheads and from refineries to storage facilities, to transportation terminals, and end users. Hess owns a range of assets, spanning collection, processing and storage, as well as terminal and export, based in the rich Bakken formation of North Dakota.
Hess posted gains in the second quarter of this year, with net income of $ 162 million, up from $ 107.8 million in the previous year’s quarter. Per share, income was 44 cents, up 51% from 2Q20. As for revenue, Hess reported total revenue of $ 294 million. This is about 9% more than the second quarter of the previous year and the highest result of the past two years. Revenues have increased in each of the past three quarters.
Regarding investor dividend interest, Hess reported second quarter distributable cash flow of $ 207.5 million. This supported a dividend payment of 50 cents to common shareholders. At $ 2 annualized, the dividend pays 7.8%. Hess has steadily increased his dividend payout over the past few years, COVID or not COVID.
Scotiabank analyst Alonso Guerra-Garcia sees many reasons for optimism at Hess Midstream.
“This year, we continued to see an outperformance in HESM’s operating results as gas capture exceeded expectations,” Garcia noted. “HESM achieves the right mark on principal repayment, while optimizing (and continuing to reduce) the balance sheet, and maintains the financial flexibility to repay additional capital. The increase in activity in the Bakken with the third HES’s platform (potentially the fourth next year) also sets for continued long-term growth.
To that end, Garcia sets a price target of $ 29 here, indicating a 12% upside margin over the next 12 months. Based on the current dividend yield and expected price appreciation, the stock has a potential total return profile of around 20%. (To see Garcia’s record, Click here)
Overall, there are 5 ratings on Hess Midstream, and they include 4 buy and 1 wait, for strong buy consensus from analysts. HESM shares are priced at $ 25.87 and the average price target of $ 28.60 implies an increase of about 11% for next year. (See the analysis of HESM shares on TipRanks)
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Disclaimer: The opinions expressed in this article are solely those of the analysts presented. The content is intended to be used for informational purposes only. It is very important to do your own analysis before making any investment.
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