My best energy stocks to buy in February

Oith energy stocks rising while so many other sectors of the market flounder, many investors are beginning to rethink their positions in this once downtrodden industry. There are many ways to invest in this industry, but some really stand out from the rest.

MPLX (NYSE: MPLX), in my opinion, is one of those standouts. Here’s why you might want to consider adding MPLX to your portfolio this month.

Image source: Getty Images.

Stable business, disciplined management

For the most part, midstream operations – product movement and storage – are the least volatile segment of the oil and gas industry. While commodity prices can turn on a dime, the actual volume of those commodities remains relatively constant.

Think about it for a moment. In 2020, when the pandemic hit the oil market hardest, oil prices rose from around $60 a barrel, fell below zero for a day and ended the year at around $50 a barrel. The economy and the movement of people came to a virtual standstill for months. And yet, through it all, total oil consumption in 2020 was only 9% from the previous year.

That says a lot (the pun is so bad I cringe) about the constancy of oil consumption and the stability of the main business. There are, of course, different segments of the midstream business that are more volatile than others. Overall, however, they are much less volatile than other segments like expiry and production or oil services.

However, for a company to truly monetize the stability of this segment of the value chain, you need a disciplined management team that is focused on a few things: putting in place service contracts that minimize exposure to commodity prices, maintain a conservative balance sheet and be good stewards of shareholder capital. MPLX was one of the few mid-tier operators to tick all three boxes.

About two-thirds of its adjusted value earnings before interest, taxes, depreciation and amortization (EBITDA) comes from its logistics and storage segment. This segment of the business includes long distance pipelines and terminals which operates under fixed price service agreements and minimum volume commitments with its primary customer, Marathon Oil, which also owns 62% of the outstanding shares of MPLX. Moreover, its collection and processing segment is also largely protected by contracts.

On the balance sheet side, the company has a debt to EBITDA ratio of 3.1. This level of leverage puts it on par with some of the other large master limited partnerships known for their conservative balance sheets such as Enterprise Product Partners and Magellan channel partners. Additionally, like other conservatively managed midstream companies, MPLX generates more than enough cash to sufficiently cover its payout to shareholders. Last quarter, it generated 1.64 times more distributable cash flow than was spent on regular distributions.

However, having contracts in place to protect revenue and a conservative balance sheet are some of the minimum requirements to be a decent investment in this space. What really separates the wheat from the chaff is what management does (or sometimes doesn’t do) to generate returns for shareholders.

Increase shareholder value by… not investing in growth?

Growth of a business can have many meanings, and knowing which counts is particularly important in the middle sector. Growth can mean building new assets that increase the company’s footprint, or growth can mean increasing the company’s per-share value. Most of the time they are the same, but not always. Sometimes investing in new pipes or acquiring other businesses falls into the “empire building” category which adds more assets to the balance sheet, but the cost of getting there – either in the form of additional debt or equity issue – exceeds the value added by the new asset.

This is one of the areas where MPLX stands out as one of the best investments in this industry. The company spent $600 million in capital expenditures in 2021 and expects to spend around $900 million in capital expenditures for 2022. That’s peanuts for a mid-tier company with a $34 billion market cap and a third of what it spent in 2019.

On the surface, that doesn’t sound very good. The difference between now and then, however, is that the past decade has seen a huge increase in investment to meet growing shale oil and gas production. This massive wave of construction has made it harder to find high yielding projects to invest in. A study by the American Petroleum Institute estimates that the entire oil and gas industry will only need to spend between $20 billion and $50 billion a year on growth projects by 2035. With so many players in the industry, this number is dividing quite quickly.

Instead of looking for growth for growth’s sake, MPLX management seems to be investing where it can add the most value to its business. Last quarter, its return on invested capital (ROIC) was 16.9%, which compares incredibly well to many empire builders in the industry with an ROIC of between 2.7% and 8.5%.

Growth is important, but not when rates of return are so low. Instead, MPLX chooses to return capital to shareholders. Last year, the company announced both a special distribution and a billion-dollar share buyback program. Since that announcement, it has repurchased $337 million worth of shares.

A stock of energy to buy

Everything so far points to MPLX being a worthy addition to a wallet, but now it’s particularly timely to consider this title for a reason: it’s still very cheap.

At the time of this writing, MPLX has a distribution efficiency of 8.4%. That’s still well above its long-term historical average of 7.3% and well above anything you’ll get from a broader exchange-traded fund.

I can’t say for sure where the oil and gas market will go from here – no one can – but the way MPLX management has looked out for shareholder interests in the past shows that it is this is a title worth considering now.

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Tyler Crowe owns Enterprise Products Partners, MPLX LP and Magellan Midstream Partners. The Motley Fool recommends Enterprise Products Partners and 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.

James T. Quintero