3 Midstream Energy Dividend Stocks for Steady Passive Income

The rise of artificial intelligence (AI) is impacting various industries, including the energy sector. The increasing adoption of AI and cloud computing technologies is driving significant growth in data center demand. According to the International Energy Agency's 2024 report, global data center electricity consumption is projected to double by 2026. This surge in data center growth is increasing the need for reliable energy sources, with natural gas (NGX24) emerging as a key player. 

At the intersection of AI-driven power demand and natural gas production are midstream energy companies – the often-overlooked workhorses of the oil and gas industry. These firms, specializing in the transportation, storage, and processing of natural gas and other energy products, typically boast more stable cash flows than their upstream or downstream counterparts, as they're less directly exposed to the volatile swings of commodity prices. 

This stability often results in consistent dividend payments, making them attractive to income-focused investors. Let’s explore three midstream energy dividend stocks that are well-positioned to benefit from the AI data center megatrend, while providing investors with a steady stream of passive income. 

Energy Dividend Stock #1: Antero Midstream Corporation (AM)

Antero Midstream Corporation (AM) is a mid-cap player in the midstream energy sector, focusing on gathering, compression, processing, and fractionation assets primarily in the Appalachian Basin. 

Over the past year, AM stock has gained about 25%, including a return of 19.8% so far in 2024. AM also offers an appealing dividend yield of approximately 5.99%, based on its quarterly dividend of $0.225 per share.

Financially, Antero Midstream reported solid Q2 2024 results, with adjusted earnings per share of $0.23 narrowly missing expectations. The company generated revenues of $270 million, up from $258 million a year ago, driven by increased high-pressure gathering volumes. Free cash flow surged 41% year over year to $43 million, after dividends.

During the quarter, Antero Midstream strategically expanded its footprint in the Marcellus Shale through a $70 million bolt-on acquisition of compressor stations and gathering pipelines from Summit Midstream. This move is expected to be immediately accretive to free cash flow, and has prompted the company to raise its 2024 guidance.

For the full year 2024, AM projects adjusted EBITDA between $1.020 million and $1.060 million, and free cash flows after dividends ranging from $235 million to $275 million. Antero Midstream aims to achieve a leverage target of 3x by the end of 2024, potentially paving the way for a share buyback program.

Analysts have a cautious stance on AM, with a consensus rating of "hold" and a mean price target of $14.36, a slight discount to Friday's close. Out of seven analysts covering the stock, two recommend a “strong buy,” three suggest a “hold,” one advises a “moderate sell,” and one recommends a “strong sell. ”

Energy Dividend Stock #2: Kinetik Holdings Inc. (KNTK)

Valued at $6.8 billion, Kinetik Holdings Inc. (KNTK) is a fast-growing player in the midstream energy sector, focusing on the transportation and processing of natural gas and crude oil (CLX24) in the Permian Basin. They offer an attractive dividend yield of approximately 6.70%, with a quarterly dividend of $0.75 per share. 

KNTK has outperformed on a YTD basis, with the shares up by 34.5% in 2024. Priced at less than four times forward cash flows, the stock still seems reasonably valued.

Financially, Kinetik reported robust Q2 2024 results, with net income surging by 52% year-over-year to $108.9 million, and revenues totaling $359.46 million, surpassing analysts' expectations. The company's adjusted EBITDA reached $234.4 million, reflecting a 13% increase from the previous year. Following these strong results, Kinetik revised its full-year adjusted EBITDA guidance range upwards to between $940 million and $980 million.

A major development for Kinetik in 2024 is its strategic partnership with Diamondback Energy and EPIC Midstream Holdings, announced on Sept. 24. This collaboration involves acquiring a 30% equity interest in the EPIC Crude pipeline system and establishing new transportation arrangements. These initiatives are expected to secure long-term volume commitments starting in 2025, enhancing Kinetik's governance role and operational capacity.

Analysts maintain a "moderate buy" rating on the stock, with five recommending a “strong buy,” one suggesting a “moderate buy,” and six advising a “hold.” KNTK trades roughly flat with its mean price target of $44.70, while the Street-high target is $48.

Energy Dividend Stock #3: Energy Transfer LP (ET)

With a market cap of $53.6 billion, Energy Transfer LP (ET) is a titan in the midstream energy sector, boasting an extensive network of pipelines and processing facilities across North America. With over 130,000 miles of pipeline infrastructure spanning 44 states, ET's strategic focus is on the transportation, storage, and processing of natural gas, natural gas liquids (NGLs), crude oil, and refined products. ET offers an attractive dividend yield of approximately 8.04%, with a quarterly dividend of $0.32 per share.

Over the past 52 weeks, ET stock has gained 15.2%, with the shares up 16.5% on a YTD basis.

Financially, Energy Transfer reported Q2 2024 net income attributable to partners of $1.31 billion and adjusted EBITDA of $3.76 billion, up from $3.12 billion in Q2 2023. Despite missing revenue estimates with $20.73 billion against an expected $22.01 billion, the company raised its full-year adjusted EBITDA guidance to between $15.3 billion and $15.5 billion. Looking ahead, analysts project ET's earnings per share to reach $1.35 for the current fiscal year, a 23.9% year-over-year increase. 

In July 2024, Energy Transfer announced a strategic joint venture with Sunoco LP(SUN) to combine their crude oil and produced water gathering assets in the Permian Basin. ET holds a 67.5% interest in this venture, which is expected to enhance distributable cash flow per unit. Additionally, ET completed the acquisition of WTG Midstream Holdings LLC, adding approximately 6,000 miles of gas gathering pipelines and increasing its processing capacity in the Delaware Basin.

Energy Transfer's ongoing capital investment plans, including a projected $3-3.2 billion spend in 2024 to expand its asset base, demonstrate its commitment to growth and infrastructure development. 

Analysts maintain a “strong buy” consensus opinion on ET, with 13 out of 15 analysts recommending a “strong buy,” one recommending a “moderate buy,” and one suggesting a “hold.” The current mean target price of $19.07 indicates expected potential upside of about 18.7%.

Conclusion

To wrap things up, Antero Midstream (AM), Kinetik Holdings (KNTK), and Energy Transfer (ET) all present compelling opportunities for investors seeking steady passive income in the midstream energy sector. With their strong industry positioning, strategic expansions, and attractive dividend yields, these companies are set to capitalize on the growing demand for natural gas, particularly from emerging sectors like data centers and AI infrastructure. While the energy sector always carries inherent risks, these stocks offer a balanced mix of stability and growth potential.