3 High-Yield Energy Stocks to Buy as Rate Cut Boosts Commodities

The price of crude oil is down roughly 20% in the United States over the past 12 months, with WTI crude now at $71 per barrel. At the same time, the Federal Reserve just cut its benchmark interest rate by 0.50%, which could boost commodity prices going forward.

As a result, now is a good time to look through the energy sector for potential bargains. Valuations have become more attractive for many of the world’s top oil companies. In addition, many energy stocks continue to pay high dividends to shareholders.

In this article, we will discuss three high-yield energy stocks that we think are worth owning right now to benefit from the ongoing tailwinds for the energy sector.

1. BP plc (BP)

BP BP is one of the largest oil and gas corporations in the world based on its $89 billion market cap. It is a fully-integrated company and operates in two segments: upstream and downstream (mostly refining).

In late July, BP reported financial results for the second quarter of fiscal 2024. Refining margins contracted significantly off of record levels, but the price of oil improved sequentially. As a result, earnings per share (EPS) edged up 3%, from $0.97 to $1.00, and exceeded the analysts’ consensus by $0.09. BP has beaten the analysts’ consensus in 10 of the last 14 quarters and has reduced its debt in 15 of the last 17 quarters.

It also raised its dividend by 10% and reiterated that its dividend is sustainable even at a brent price of $40. Moreover, it maintained its share repurchase program of $14 billion until the end of 2025. This program can reduce the share count by 16% at the current stock price. BP also has a cost-cutting program that will save $2 billion per year from 2027.

BP has greatly improved its portfolio in recent years via the addition of low-cost reserves. In 2020, it announced a major shift in its strategy. BP announced that it would boost its investment in renewable energy sources 10-fold, and that it would simultaneously reduce its investment in oil and gas projects so much that it expected to reduce its oil and gas production by 42%, from 2.6 million barrels per day now to 1.5 million barrels per day in 2030. However, last year, the company announced that it will implement this transition much more slowly than it initially planned.

We view the current dividend as fairly safe, particularly given the drastic reduction of the debt of BP in the last three years. BP stock currently yields 5.4%.

2. Kinder Morgan (KMI)

Kinder Morgan KMI is a leading midstream energy company that owns North America's largest CO2 transportation, independent refined products transportation, independent terminal and natural gas transmission businesses. As a result of its immense scale, it transports approximately 40% of the United States’ natural gas.

Given that 94% of its EBITDA is resistant to short-term commodity price movements, it enjoys a very stable cash flow profile. Its resistance to swings in the energy industry is further enhanced by the fact that the vast majority of its counterparties are investment grade.

On July 17, 2024, Kinder Morgan reported its financial results for the second quarter of 2024. The company's EPS stood at $0.25, consistent with the same quarter in 2023, but slightly missing analyst estimates by a small margin. The company generated revenue of $3.57 billion, which was a 2.03% year-over-year increase.

Kinder Morgan reported second-quarter earnings per share of $0.26 and distributable cash flow (DCF) per share of $0.49, the latter representing a 2% increase compared to the second quarter of the previous year. The company achieved a net income attributable to KMI of $575 million, slightly down from $586 million in the same period last year, while the DCF for the quarter increased to $1.1 billion from $1.076 billion in Q2 2023.

In addition to its financial performance, Kinder Morgan's board of directors approved a cash dividend of $0.2875 per share for the second quarter, which represents an annualized dividend of $1.15 per share. This dividend marks a 2% increase over the second quarter of 2023 and will be payable on August 15, 2024, to stockholders of record as of July 31, 2024.

Given its solid investment grade credit rating, significant liquidity and leverage ratio that is now below its long-term target, KMI’s dividend looks very safe. When you combine these factors with the fact that it has grown its dividend for five consecutive years and it has a mere 52.1% payout ratio, the dividend is not only very safe but also likely to continue growing in the coming years.

Its forward dividend yield of 5.3% makes it a very attractive high yield energy stock.

3. ONEOK Inc. (OKE)

ONEOK OKE is an energy company that engages in the gathering and processing of natural gas, as well as a natural gas liquids business and natural gas pipelines (interstate and intrastate). ONEOK also owns storage facilities for natural gas. ONEOK is headquartered in Tulsa, Oklahoma, and was founded in 1906. ONEOK reported its second quarter earnings results on August 5, 2024. 

The company reported that it generated revenues of $4.9 billion during the quarter, which was 31% more than the revenues that ONEOK generated during the previous year’s quarter. The revenue movement compared to the prior year’s quarter was influenced by commodity price movements, while the Magellan Midstream takeover also impacted revenues.

ONEOK’s adjusted EBITDA was up nicely compared to the previous year’s period, rising by 65% to $1.62 billion. EBITDA also was up on a sequential basis, although less compared to the year-over-year growth rate. ONEOK earned $1.33 per share during the second quarter, but that number is lower than the company’s cash flows due to depreciation charges. 

The company is forecasting EBITDA at $6.2 billion for the current year, representing a close to 20% increase versus 2023. The acquisition of Magellan Midstream partners and the capturing of related synergies will have a positive impact.

ONEOK has reduced its organic growth spending to some degree, as this will allow ONEOK to pay down debt in the coming years. Overall, growth spending should still allow for some earnings growth in the long run, and the takeover of Magellan Midstream should have a positive impact on ONEOK’s growth as well.

A lot of ONEOK’s revenues, especially after the roll-up of its MLP, are fee-based or hedged, which makes the company less sensitive to commodity price swings. Therefore ONEOK can operate with considerable leverage without being in dangerous territory, as its cash flows are not overly volatile, although they are still impacted by the volumes that are transported by ONEOK.

OKE stock currently yields 4.2%.

At the time of publication, Ciura had no positions in any securities mentioned.