Natural gas and natural gas liquids have a bright future in the energy landscape. According to recent research by the U.S. Energy Information Administration, domestic natural gas production is expected to be fully recovered to pre-COVID-19 levels by early 2023 and the long-term growth profile remains promising. In particular, international export potential looks increasingly robust due to global demand growth as developing economies look for affordable clean energy alternatives to fuel their growth. In fact, the EIA expects U.S. LNG exports to more than double between 2020 and 2029. As a result, natural gas production is expected to increase steadily through 2050, giving it nearly 3 decades of growth runway at a minimum.
For investors looking to ride the natural gas and NGL wave and who are looking for attractive current income combined with steady long-term growth that is at least somewhat indexed to inflation, two promising investments include ONEOK (NYSE:OKE) and Enbridge (NYSE:ENB). In this article, we will compare them to see which is more attractively priced today.
OKE Stock: Natural Gas Pureplay With Stronger Growth Potential
OKE owns a high-quality portfolio of assets that have performed well through tumultuous energy markets in recent years. It is a great way to invest in the natural gas and NGL trend as it derives all of its EBITDA from these segments. In 2021, 26.3% of its EBITDA came from natural gas gathering and processing, 58.1% came from NGLs, and 15.6% came from natural gas pipelines.
As the chart below illustrates, over the past decade OKE has seen its distributable cash flow per share growth every year except for 2020, though the 10.1% decline was quite modest given the headwinds facing the global economy and energy sector in particular. It is even more impressive when you consider that natural gas liquids volumes in its main areas of operation declined by over 20% sequentially in Q2 2020.
Furthermore, cash flow generation bounced back quickly and this year DCF/share is expected to be 29.3% higher than it was in 2019, good for an 8.94% CAGR over that span.
Much of this performance strength lies in the fact that 90% of OKE’s earnings are fee-based, ~85% of its customers are investment-grade, and what little commodity price exposure it has is hedged, making its cash flows extremely resilient to market headwinds.
Moving forward, growth is expected to remain quite strong as well, with DCF/share forecast by analysts to grow at a 7.1% CAGR between 2023 and 2026. This growth is likely to be driven by a combination of the aforementioned strong growth in natural gas and NGL demand, inflation-indexed pipeline contracts, share buybacks, and continued opportunistic growth investments. In particular, it expects to see increased production activity driving growth in its pipeline volumes in the Rockies, where it is currently running at just 62% of its full capacity.
While the company…
Read More: Enbridge Vs. ONEOK: Which Is A Better Natural Gas Play (ENB) (OKE)