The energy sector offers investors a great way to score a high dividend yield. The average energy stock currently yields around 4%, more than double that of the S&P 500.
While high-yield dividend stocks can be at higher risk of reducing their dividend during tough times, many energy companies are taking steps to minimize this risk. One way they do that is by optimizing their portfolios to enhance their strategic focus and cash flows. That has been a key theme for the energy midstream sector over the last few months. Several of these companies made moves to strengthen their portfolios, which should put their high-yielding dividends on a more sustainable foundation.
Win-win deals
Canadian energy infrastructure giant Enbridge(NYSE: ENB) has completed two transactions to enhance its U.S. Gulf Coast export strategy. In the first deal, Enbridge made a trade with refining giant Phillips 66(NYSE: PSX) to increase its ownership in the Gray Oak oil pipeline from 22.75% to 58.5%. In exchange, it decreased its interest in DCP Midstream(NYSE: DCP) from 28.25% to 13.2%. Enbridge also received $400 million in cash to balance out the trade.
In the second deal, Enbridge partnered with Plains All American(NASDAQ: PAA) to acquire Western Midstream's (NYSE: WES) 15% interest in the Cactus II oil pipeline for $265 million. Plains All American will increase its stake in that pipeline from 65% to 70%, while Enbridge's will expand from 20% to 30%.
Those deals increase Enbridge's interest in oil pipelines transporting crude from the Permian Basin to the Gulf Coast. One destination of both is the Enbridge Ingleside Energy Center, the largest U.S. oil export facility by volume. As a result, Enbridge enhanced its U.S. Gulf Coast export strategy. It also increased its earnings from stable pipelines and lessened its commodity price exposure by reducing its interest in DCP Midstream, which gathers and processes natural gas and natural gas liquids (NGLs). Those moves put Enbridge's 6.3%-yielding dividend on an even firmer foundation.
These mutually beneficial transactions also enhanced the strategies of the other parties involved. Phillips 66 bolstered its NGL strategy, putting its 3.7%-yielding dividend on a firmer foundation. Plains All American Pipeline optimized its portfolio by increasing its stake in a key pipeline, providing more stable income to support its 6.9%-yielding payout. Finally, Western Midstream was able to sell a non-core asset to focus on its core gathering and processing business. That enhanced its balance sheet and ability to sustain its 7.3%-yielding dividend.
Enhancing the core
Crestwood Equity Partners(NYSE: CEQP) has also completed several mutually beneficial transactions in recent months. The MLP has sharpened its focus on its three core basins by selling two non-core assets. It sold its Marcellus natural gas gathering and compression assets to Antero Midstream(NYSE: AM) for $205 million in cash and its Barnett Shale assets to EnLink Midstream(NYSE: ENLC) for $275 million in cash.
Those deals provided Crestwood with some of the cash needed to fund its $600 million acquisition of Sendero Midstream. That transaction and the purchase of its partner's 50% interest in their joint venture significantly enhanced the company's position in the Permian Basin. By selling non-core assets to help improve a core position, Crestwood maintained a solid balance sheet while optimizing its portfolio. That puts its 8.9%-yielding payout on an even firmer foundation.
The win-win deals also benefited the buyers. Antero was able to bolster its position in the Marcellus. The deal is immediately accretive to its free cash flow, enhancing its ability to pay its 8.2%-yielding dividend. Meanwhile, EnLink improved its position in the Barnett. That deal is one of the many factors that gave EnLink the confidence to recently boost its dividend by 20%, pushing its yield to nearly 4%.
Putting their payouts on even firmer foundations
There has been a lot of wheeling and dealing in the energy midstream sector this year. The common thread is that companies are focused on optimizing their portfolios to enhance their strategies. These moves allow them to improve their cash flows while maintaining solid financial profiles. That's putting their high-yielding payouts on even more sustainable long-term foundations. Because of that, the energy midstream sector is looking increasingly attractive for those seeking high-yielding dividends to generate passive income.
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Matthew DiLallo has positions in Crestwood Equity Partners LP, Enbridge, and Phillips 66. The Motley Fool has positions in and recommends Enbridge. The Motley Fool has a disclosure policy.
