‘Outsized upside’ could be around the corner for these dividend-paying energy plays, Morgan Stanley says
Investors have been shy about getting into midstream stocks in the thick of the uncertainty in the Middle East, but those who are selective may find good entry points, according to Morgan Stanley. President Donald Trump said earlier this week that the U.S. and Iran have agreed to a memorandum of understanding , which could end the conflict between the two countries. Oil prices have been on the decline since then, with West Texas Intermediate crude futures touching $75.52 per barrel, their lowest level since March 5. “De-escalation of the Iran war and resumption of traffic out of the Strait of Hormuz raise risk of further near-term selling pressure across energy equities,” wrote analyst Robert Kad in a June 9 report. “However, global oil and refined product markets have moved to pronounced deficits, full normalization in trade flows will likely not be achieved until late 2026/early 2027 even if transit resumes imminently, and rebuilding of commercial and strategic reserve inventories globally could be a multiyear process,” he added. This means that there could be higher mid-cycle crude oil prices, the analyst said. Though a rotation into energy will likely focus on corners of the market with direct sensitivity, it should be directionally positive for midstream and “offer more outsized upside for oil-levered midstream equities,” Kad added. Looking out longer term, Kad’s team sees median one-year total return upside of 19.9% within the firm’s midstream infrastructure coverage, plus a 4.7% dividend yield. Here are some of the midstream names Kad’s team highlighted as contenders for that “outsized upside.” Targa Resources turned up on the list, and it’s also one of Morgan Stanley’s “top picks.” The firm rates the stock overweight, and its price target of $331 calls for 26% upside from Monday’s close. “Balance sheet remediation has positioned TRGP well to fund organic capital investment while increasing return of capital,” Morgan Stanley analysts wrote. “Inflecting [free cash flow] supports dividend growth and ongoing share repurchases, with 40-50% of operating cash flow expected to be designated for return of capital.” Targa lifted its quarterly dividend in April to $1.25 per share, reflecting a 25% increase. The stock has a dividend yield of 1.9%, and it’s up 40% in 2026. Oneok also showed up in the report. Morgan Stanley rates the stock overweight, and its price target of $113 implies upside of 29% from Monday’s close. “Well-positioned to capture increased rig efficiencies, flared gas, [drilled but uncompleted well] backlogs, rising [gas to oil ratios] and ethane recovery in the Bakken,” Morgan Stanley wrote. Oneok’s 2024 acquisition of Medallion and its controlling interest in Enlink also provide “a new platform for growth in the Permian Basin,” the firm wrote. Back in January, Oneok also lifted its quarterly dividend to $1.07 per share, a 4% increase. The stock, which has a current dividend yield of nearly 5%, is up 17% in 2026. Finally, Morgan Stanley highlighted WaterBridge Infrastructure . The firm is overweight on this stock with a price target of $38, suggesting shares could gain about 18%. “WBI offers the highest EBITDA growth within our midstream sector coverage,” the firm said. “Growth is supported by high return capital projects. We see further re-rating potential as water transitions from a services to a midstream business.” Shares are up 61% in 2026, and the stock offers a dividend yield of 0.6%.
