In late April, natural gas prices at Henry Hub reversed a three-month dip and started rising again. As a result, natural gas futures prices are now back to the same levels as early this year. The price shift has also led to a shift in viewpoint. The prospect of stronger prices and profits amid rising demand has sparked a round of investor interest in energy stocks.
Five-star analyst Michael Blum, who covers the energy sector for Wells Fargo, looks at multiple reasons for an optimistic view of the energy sector – and comes to a simple conclusion: “We see continued multiple expansion for midstream natural gas stocks, driven by growing demand for gas supported by AI, re-shoring, LNG, etc.”
Blum elaborates on this further, emphasizing: “Investors typically look negatively at midstream investments after experiencing a period of disappointing returns. However, investor psychology regarding capital investments 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. linked to data center demand), we believe growth (and capital investment) can be viewed favorably again. Higher growth rates tend to support higher EV/EBITDA multiples.”
Against this backdrop, Wells Fargo analysts Blum and his colleagues are telling investors to pull the trigger, especially on two natural gas midstream 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 midstream natural gas sector. The company began building pipelines for the growing petroleum industry in 1908. Today, Williams owns and operates a continental network of natural gas resources, including gathering and storage facilities, pipelines and processing plants.
This network is centered on the Texas-Louisiana-Mississippi Gulf Coast and extends into the Gulf and eastward to Florida. In the northeast, the company’s network extends to the natural gas fields of Appalachia, while in the northwest it extends through the Plains to the central Rocky Mountains and into the Pacific Northwest. The Williams Companies play a role in moving about one-third of all natural gas used in the U.S. for cooking, home heating and electricity generation.
All of this produces more than just big companies: it produces billion-dollar companies. Williams reported $2.77 billion in revenue in the first quarter of 24, a figure that was 10% lower than the previous year but exceeded forecasts by $80 million. In other key measures, the company reported $1.234 billion in cash flow from operations, and reported that it had $1.507 billion in available funds from operations. The latter figure rose 4%, or $62 million, year over year.
Ultimately, Williams had non-GAAP net income of $719 million, which equates to earnings per share of 59 cents per share. Earnings per share exceeded forecasts by 10 cents and were 5% higher than in the same period last year.
The company’s solid results supported the dividend declaration, which was made on April 30 for a June 24 payout. The dividend was set at 47.5 cents per common share, an increase of 6% year-on-year. The annualized rate of $1.90 gives a forward yield of 4.5%. Williams has a reputation for reliable dividend payments.
Analyst Praneeth Satish sees WMB ahead of Wells Fargo and sees plenty of reasons why the stock should continue to perform.
“WMB, with essentially 100% exposure to natural gas, is uniquely positioned to benefit from rising domestic electricity/gas demand over the next decade through higher pipeline and storage volumes (longer runway for the gas demand), higher G&P volumes (longer runway for gas demand), higher E&P profits (potentially higher gas prices LT) and higher marketing profits (more gas price volatility),” Satish opined.
To make this concrete, Satish has upgraded WMB shares from Equal Weight (i.e. Neutral) to Overweight (i.e. Buy). Additionally, the analyst raises his price target to $46, indicating 13% upside potential over the next twelve months. Including the dividend yield, the potential return here is close to 17.5%. (To view 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 a single Sell, the stock has a consensus rating of Moderate Buy. However, the analysts expect the shares to remain within their range for the foreseeable future, as evidenced by the average price target of $41.28. (To see WMB stock forecast)
Kinder Morgan (RMI)
The second stock we’ll look at here is one of the largest energy infrastructure companies in the S&P 500 index, with an asset network that spans the continental US and a market capitalization of $43.7 billion. The company’s goal is to provide the broadest possible access to reliable and affordable energy, and to that end it provides safe, efficient services for the transportation and storage of hydrocarbon resources. Kinder Morgan’s operations include full and partial ownership interests 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 meters of renewable natural gas generation capacity.
Kinder Morgan’s pipeline network transports large volumes of natural gas, but the company’s operations are not limited to that one resource. It also transports crude oil, refined petroleum products, renewable fuels, condensate and even CO2. The company’s terminal facilities have the capacity to process and store a wide range of raw materials, 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 can be seen in the company’s Q1 24 report. Kinder Morgan reported total revenue of $3.84 billion, down 1.3% year over year – and $540 million below forecast. The company’s non-GAAP earnings per share were 34 cents per share. While that was in line with expectations, it was also a 13% increase from the previous year.
According to a key metric for dividend-conscious investors, the company’s distributable cash flow (DCF) was $1.422 billion, up 3.5% year over year. Per share, the DCF amounted to 64 cents, which represents a gain of 5% on an annual basis. The DCF per share fully covered the payment of the common share dividend of 28.75 cents, announced on April 17 and paid on May 15. The dividend is $1.15 per common share annually and yields 5.8%.
For Wells Fargo’s view, we can turn again to analyst Michael Blum, who notes that Kinder Morgan is poised for strong gains as headwinds diminish.
“Over the past five years, KMI’s basic EBITDA has been negatively affected by headwinds in gas recontracting (the expiration of old, more expensive contracts to a lower market rate environment). We expect the opposite to now occur in the gas storage and pipeline segments. Given this dynamic will play out over the years and terminal value risk is lower as US energy demand increases, we believe KMI will benefit from continued multiple expansion,” Blum opined.
Like Williams above, this company gets an upgrade from the Wells Fargo analyst, from equal weight to overweight. Blum’s price target of $22 implies a one-year upside of 11%. (Click here to view Blum’s track record.)
In total, there are 12 recent analyst ratings of KMI stock, and the breakdown of 5 Buys and 7 Holds gives a consensus rating of Moderate Buy. The shares are priced at $19.80, and the average price target of $20.73 suggests ~5% upside over one year. (To see KMI stock forecast)
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Disclaimer: The opinions expressed in this article are solely those of the featured analysts. The content is for informational purposes only. It is very important to do your own analysis before making an investment.
