In late April, natural gas prices at Henry Hub reversed their three-month decline and began to rise again. As a result, natural gas futures prices have now returned to the same levels as earlier this year. The price action also triggered a change in position. The prospect of higher prices and profits, amid rising demand, has sparked renewed investor interest. energy values.
Covering the energy sector for Wells Fargo, 5-star analyst Michael Blum examines the multiple reasons why he takes a bullish view of the energy sector – and it boils down to one simple conclusion: “We’re seeing expansion continued multiples for natural gas midstream stocks, driven by growing gas demand driven by AI, reshoring, LNG, etc.
Blum elaborates further, pointing out: “Investors generally view midstream investments negatively after going through a period of disappointing returns. However, investors’ investing psychology could be changing (at least for natural gas names). As ROIC increases and investors become more comfortable with the visibility of future returns (e.g. related to data center demand), we believe growth (and investment) could once again be considered favorably. Higher growth rates generally tend to support higher EV/EBITDA multiples.
Against this backdrop, Wells Fargo analysts Blum and colleagues advise investors to pull the trigger, particularly on two midstream natural gas stocks. We ran these tickers through the TipRanks Database to see what other Street experts think of their prospects.
The Williams Companies (WMB)
We’ll start with Williams Companies, a $50 billion name in the natural gas midstream sector. The company began operations in 1908, building pipelines for the growing oil industry. Today, Williams owns and operates a continent-wide network of natural gas assets, including gathering and storage facilities, pipelines and processing plants.
This system is centered on the Gulf Coast of Texas, Louisiana, and Mississippi and extends into the Gulf and east to Florida. In the northeast, the company’s network extends to the natural gas fields of the Appalachian Mountains, while in the northwest, it extends across the plains to the central Rocky Mountains and up in the northwest Pacific. The Williams companies help transport about one-third of all natural gas used in the United States for cooking, home heating and electricity generation.
All of this represents more than just big business: it represents billions of dollars in revenue. Williams reported 1Q24 revenue of $2.77 billion, down 10% from a year earlier but beating forecasts by $80 million. In other key metrics, the company reported $1.234 billion in cash flow from operations and said it had $1.507 billion in available funds from operations. The latter figure was up 4%, or $62 million, year over year.
Ultimately, Williams delivered non-GAAP net income of $719 million, supporting EPS of 59 cents per share. Earnings per share beat forecasts by 10 cents and were up 5% from the same period a year ago.
The company’s strong results supported the dividend declaration, made on April 30 for payment on June 24. The dividend was set at 47.5 cents per common share, up 6% year-over-year. The annualized rate of $1.90 gives a forward yield of 4.5%. Williams has a reputation for paying reliable dividends.
Covering WMB for Wells Fargo, analyst Praneeth Satish sees plenty of reasons why the stock should continue to shine.
“WMB, with essentially 100% exposure to natural gas, is uniquely positioned to benefit from rising domestic demand for electricity and gas over the coming decade via higher pipeline and storage volumes. (longer runway for gas demand), higher G&P volumes (longer runway for gas demand), higher E&P profits (potentially higher long-term gas prices), and marketing (more gas price volatility),” Satish said.
To put this into concrete terms, Satish upgraded WMB shares from equal weight (i.e. neutral) to overweight (i.e. buy). Additionally, the analyst raises his price target to $46, suggesting 13% upside potential over the next 12 months. With the dividend yield added, the potential yield here approaches 17.5%. (To see Satish’s track record, Click here)
So that’s Wells Fargo’s view, what does the rest of the Street have in mind? The current outlook presents a conundrum. On the one hand, based on 9 Buys, 8 Holds, and just 1 Sell, the stock has a Moderate Buy consensus rating. However, analysts expect the shares to remain range-bound for the foreseeable future, as indicated by the average price target of $41.28. (See WMB Stock Forecast)
Children Morgane (KMI)
The second stock we’ll look at here is one of the largest energy infrastructure companies in the S&P 500, with a network of assets that spans the continental United States and a market capitalization of 43 .7 billion dollars. The company’s goal is to provide the widest possible access to reliable and affordable energy and, to this end, it provides safe and efficient services for the transportation and storage of hydrocarbon resources. Kinder Morgan’s operations include interests in whole or in part in 79,000 miles of pipelines, 139 terminals and 702 billion cubic feet of natural gas storage capacity. The company also has more than 6 billion cubic feet of renewable natural gas production capacity.
Kinder Morgan’s pipeline network transports significant volumes of natural gas, but the company’s operations are not limited to this resource alone. It also transports crude oil, refined petroleum products, renewable fuels, condensates and even CO2. The Company’s terminal facilities have the capacity to process and store a wide range of products, such as diesel fuel, gasoline, jet fuel, chemicals, petroleum coke and metals, as well as ethanol and other renewable fuels.
In recent years, Kinder Morgan’s business has faced headwinds in the form of reduced fuel demand, and the lingering effects are visible in the company’s 1Q24 report. Kinder Morgan reported total revenue of $3.84 billion, down 1.3% year over year – and $540 million below forecasts. The company’s non-GAAP EPS figure came in at 34 cents per share. While this figure is in line with expectations, it also represents an increase of 13% from the previous year.
In an important metric for dividend-minded investors, the company’s distributable cash flow (DCF) was $1.422 billion, up 3.5% year over year. Per share, DCF stands at 64 cents, a gain of 5% year-over-year. The DCF per share fully covered the company’s 28.75 cent common stock dividend payment declared on April 17 and paid on May 15. The annualized dividend is $1.15 per common share and yields 5.8%.
As for Wells Fargo’s view, we can consult again with analyst Michael Blum, who notes that Kinder Morgan is poised for solid gains as headwinds fade.
“Over the past 5 years, KMI’s core EBITDA has been negatively impacted by headwinds related to gas recontracting (expiration of older contracts at higher prices in a lower market rate environment). We expect the opposite to now happen in the gas storage and pipeline segments. Given that this dynamic will continue over several years and terminal value risk is lower with growing U.S. electricity demand, we believe KMI will benefit from continued multiple expansion,” Blum said.
Like Williams above, this company gets an upgrade from Equal Weight to Overweight from the Wells Fargo analyst. Blum’s $22 price target implies a one-year gain of 11%. (To see Blum’s track record, Click here.)
In total, there are 12 recent analyst reviews on KMI stock, and the breakdown into 5 Buys and 7 Holds yields a Moderate Buy consensus rating. Shares are priced at $19.80 and the average price target of $20.73 suggests stock appreciation of around 5% over a one-year horizon. (See KMI Stock Market Forecast)
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Disclaimer: The opinions expressed in this article are solely those of the analysts featured. The content is intended to be used for informational purposes only. It is very important to do your own analysis before making any investment.
