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3 Dividend Stocks for a Natural Gas-Fueled Future

Fossil fuels are going to be fueling our world for a long time. However, thanks to technological advances, government policies, and simple economics, which fossil fuels we use is sure to shift.

At present, there's one carbon-based fuel that's kinder to the environment while supporting renewable-energy usage: natural gas. In fact, even the most renewable-focused utilities are positioning themselves for a natural gas-fueled future.  

Image source: Getty Images.

Last year, the United States consumed about 27.49 trillion cubic feet of natural gas, accounting for about 29% of total U.S. primary energy consumption. Around 36% of that natural gas is used to generate electricity, while industry uses 28% and heating our homes and businesses consumes 27%. It also marked the biggest year yet for natural gas usage:

Data source. U.S. Energy Information Administration.

There are multiple ways for investors to take part in this trend. Natural gas exploration and production companies are obvious choices, as are utilities that specialize in natural gas usage. But perhaps the best way to earn natural gas-fueled profits is by investing in pipelines. Here's why I believe Enterprise Products Partners LP (NYSE: EPD), ONEOK, Inc. (NYSE: OKE), and Antero Midstream Partners LP (NYSE: AM) are the top three natural gas pipeline stocks on the market today.

1. Enterprise Products Partners LP

Enterprise Products Partners is one of the biggest midstream energy companies in North America. It specializes in the transportation and storage of natural gas, natural gas liquids (NGLs), oil, and various other refined products. It has an enormous network, which is a significant advantage for anyone looking to move natural gas to where it's most profitable.

Image source: Enterprise Products Partners.

Enterprise continues to benefit from increased natural gas production and consumption. Net income for the second quarter of 2017 was $666 million, up from $570 million for the second quarter of 2016. Net income attributable to limited partners was $654 million, or $0.30 per unit, on a fully diluted basis for the second quarter of 2017, an improvement from $559 million, or $0.27 per unit, last year. The improvement allowed the company to increase its cash distribution by 5% year over year to $0.42 per unit.

Investors can also rest easy at night knowing the dividend is secure. Management is focused on maintaining a realistic dividend payout. As evidenced by its recent decision to increase its dividend through FY 2018 at a slower rate than originally anticipated. The move sent the stock down some 5% but, while disappointing, only shows that the company can be counted on to be realistic about its dividend policy. Enterprise generated distributable cash flow of $1.1 billion for the second quarter of 2017, yielding 1.2 times coverage of its $0.42-per-unit cash distribution.

2. ONEOK, Inc. 

With a market capitalization of $20.55 billion, ONEOK is one of the largest energy midstream service providers in the United States. ONEOK's job is to get natural gas from where it's produced to where it's needed:

Like Enterprise Products Partners, it owns and operates one of the nation's premier NGL systems, including 38,000 miles of NGL and natural gas pipelines, processing plants with 1.8 billion cubic feet (bcf) of natural gas processing capacity, and 58 bcf of natural gas storage capacity. 

ONEOK also continues to grow alongside increased natural gas usage. On Oct. 23, the company announced a $200 million plan to expand the West Texas LPG Pipeline Limited joint venture with Martin Midstream Partners L.P., which owns 20% of the project. The investment will expand its NGL system into the white-hot Delaware Basin, part of the larger Permian Basin.

Demand for ONEOK's system is healthy. Q2 2017 profits came in at $71.7 million, or $0.33 per diluted share, and its natural gas gathering and processing segment's average fee rate increased to $0.87 per million British thermal units (MMBtu) in Q2. That's a 14.4% jump over the $0.76 per MMBtu it posted in the second quarter 2016.

The company also continues to share the wealth. In July, ONEOK declared a dividend of 74.5 cents per share, a 21% sequential increase. Such a significant jump may sound alarming, but its Q2 dividend coverage ratio was 1.5.

This is a pick worthy of consideration for anyone investing in the midstream sector. 

Antero Midstream LP

Antero Midstream is a relatively young natural gas midstream operator. The company owns midstream assets that primarily service the Marcellus Shale and Utica Shale operating regions of parent Antero Resources, which owns over 58% of the company. The Marcellus portion makes up 75% of Antero Midstream's operations.

Antero Midstream owns the midstream assets of Antero Resources' business, which means its revenues are derived from the gathering and transportation of natural gas. Though domiciled in Denver, its operations are primarily in West Virginia and Ohio, regions that continue to see a surge in natural gas production. That is perhaps a big part of the reason the company continues to see increased demand for its services.

In the company's second-quarter report on Aug. 2, compression volumes surged 81% year over year, while low- and high-pressure natural gas volumes increased 24% and 38%, respectively. These eye-popping results produced a 75% increase in net income to $0.39 per share and allowed the company to grow the quarterly distribution to $0.32 per share. With natural gas volumes continuing to surge in the region in which it operates, Antero Midstream Partners is a robust natural gas infrastructure pick for the years ahead.

Foolish takeaway

It's tough to pick a commodity stock, but there are other ways to invest in the necessary materials that form the building blocks of our world. By buying stock in the midstream operators that transport and store natural gas, investors can benefit from the shift toward cleaner fossil-fuel usage. Every one of the companies we've looked at here sport above-average dividend yields and valuable midstream assets. Foolish investors would be wise to give each one strong consideration.

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The author(s) may have a position in any stocks mentioned.


Sean O'Reilly has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends ONEOK. The Motley Fool recommends Enterprise Products Partners. The Motley Fool has a disclosure policy.