Oil prices have been surging lately, and many energy stocks are back in the spotlight.
But volatility can act as a double-edged sword, presenting both lucrative opportunities for gains and significant risks of losses. This requires investors to tread with caution and employ well-thought-out strategies.
Rather than actively trade the tumultuous waves of the market, some investors have opted to focus on the dividend-paying aspect of the business, collecting passive income from energy companies.
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With the average dividend yield of S&P 500 companies standing at 1.5%, energy companies, many of which offer yields significantly higher than the average, present an opportunity for income-focused investors.
Here's a look at two high-yield energy stocks that Wall Street finds attractive.
Sunoco LP SUN
Sunoco is a key player in America's wholesale motor fuels distribution, refined products transportation and storage and terminalling business.
Structured as a master limited partnership, Sunoco distributes motor fuel to around 10,000 convenience stores, independent dealers, commercial customers and distributors in more than 40 states.
The partnership has a quarterly distribution rate of 84.2 cents per unit, which translates to a generous annual yield of 7.3% at the current unit price.
In the second quarter of 2023, Sunoco generated $175 million in distributable cash flow, which provided 1.9 times coverage for its quarterly payout to partners.
The partnership's current quarterly distribution per unit is about 2% higher compared to a year ago. In the latest earnings conference call, management said that they expect to evaluate future distribution increases annually in the first quarter.
Sunoco stock has risen 7% in 2023 and Mizuho analyst Gabriel Moreen anticipates additional gains ahead. The analyst has a Buy rating on Sunoco and a $53 price target — around 14% above where the stock is now.
Energy Transfer LP ET
Energy Transfer owns one of the largest portfolios of energy assets in the U.S.
With approximately 125,000 miles of pipelines and associated energy infrastructure, the partnership has a strategic network that spans 41 states and all of the major production basins in the country.
Energy Transfer is affiliated with Sunoco — it owns the general partner interests, the incentive distribution rights and approximately 34% of the outstanding common units of Sunoco.
In July, Energy Transfer announced a quarterly cash distribution of 31 cents per unit. At the current unit price, the amount comes out to an annual yield of 9.1%.
In the second quarter, Energy Transfer's distributable cash flow (DCF) attributable to its partners totaled $1.55 billion. In the earnings conference call, Energy Transfer Co-CEO Tom Long pointed out that the amount "resulted in excess cash flow after distributions of $579 million."
Morgan Stanley analyst Robert Kad has an Overweight rating on Energy Transfer and a price target of $17. Considering that the stock trades at $13.57, the price target implies a potential upside of 25%.
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