2 very high yielding energy stocks to buy for 2022 and beyond

IIf it was possible to flip a switch and switch to clean energy, the world would have done it by now. But no matter how much better it would be to avoid the use of carbon fuels, we still need it. And we will continue to need it for years to come, because energy transitions take time. That’s why you might want to consider very high yield growers Magellan channel partners (NYSE: MMP) and MPLX-LP (NYSE: MPLX). Here is a quick overview of each.

1. A long chain of distribution growth

Midstream Master Limited Partnership (MLP) Magellan Midstream has grown its distribution every year since its initial public offering (IPO) in 2001. It’s an impressive two-decade streak. And the distribution yield is currently 7.9%. To put this into perspective, the S&P500 the index returns only 1.3%, and the average energy stock, using Vanguard Energy Index ETF as an approximation, has a dividend yield of 2.6%. The relatively high yield should suggest that there are some risks here. But how much risk is there?

Image source: Getty Images.

Magellan operates a collection of midstream assets focused on petroleum and refined products like gasoline and jet fuel. Essentially, it collects fees to move these energy sources through its pipelines, storage and processing facilities. As long as there is demand for these fuels, demand for Magellan’s portfolio of hard-to-replace assets is expected to remain strong. This will not change overnight.

But there are compromises. For example, Magellan seeks to hedge its distribution by approximately 1.2 times. Historically this was considered robust, but in today’s world it is considered a bit weak. However, Magellan has long focused on maintaining a strong balance sheet, with a debt-to-earnings before interest, tax, depreciation and amortization (EBITDA) ratio that sits near the bottom of its peer group.

This financial support gave the MLP the ability to weather difficult times without having to cut back its distribution. Given that management raised its full-year 2022 outlook after releasing first-quarter results, now could be a good time for a deep dive.

2. A focus on growth

MPLX LP’s business is more diversified, with midstream assets focused on oil and natural gas. It describes itself as a “growth-oriented” MLP and was founded by Marathon Oil (NYSE: MPC) in 2012. So it doesn’t have quite the same story as Magellan, but its dividend has been increased or maintained every year since its IPO.

Notably, the dividend was not increased in 2020 as the pandemic upended the broader energy sector, but a large special dividend was paid in 2021, arguably offsetting this.

MPLX’s 8.5% dispensing efficiency, on the other hand, is even more generous than Magellan’s efficiency. And that distribution was covered by cash flow of 1.6 times in the first quarter. What’s interesting here, however, is that there doesn’t appear to be a huge trade-off, as the partnership’s debt to EBITDA ratio of around 3.7x is actually just a little lower than the 3.8 times of Magellan.

So what’s the problem ? Oil and gas producer Marathon Petroleum owns more than 60% of the units and essentially manages the partnership. It’s a good thing in that he has a sponsor with a vested interest in the partnership that works well. But that’s bad in that the partnership could make decisions that benefit Marathon Petroleum over other MLPX unitholders.

While that’s an obvious possibility, it probably wouldn’t make sense to Marathon, as it would also do itself a disservice if it hurt MPLX, which handles a lot of the company’s midstream needs. While such a dependent relationship should be kept in mind, this one seems quite symbiotic and worth a closer look if you’re looking for a super high-yielding energy name.

Risk and Reward

You don’t get big returns on Wall Street without taking risks, and both Magellan and MPLX have their downsides. But if you take the time to get to know them, you might find that the risk/reward balance favors taking a position. With the energy transition set to last decades, there’s no reason to think these two high-yield names are going to falter anytime soon.

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Reuben Gregg Brewer has no position in the stocks mentioned. The Motley Fool recommends Magellan Midstream Partners. The Motley Fool has a disclosure policy.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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