by Bryan Perry | January 10, 2013 10:55 am
With the master limited partnership (MLP) sector left unscathed by the recent fiscal cliff deal, it’s my view that we should see last week’s rally in energy MLPs continue into their respective ex-div dates. Shares of Chesapeake Granite Wash Trust (NYSE:CHKR) and SandRidge Permian Trust (NYSE:PER) are two names in this area that represent good value and point of entry after being subject to year-end tax selling.
Both CHKR and PER offer yields in the 14% range and have a chance of trading 10% higher into their respective ex-dividend dates (not yet announced, but both are estimated to fall in early February), especially if crude rises further.
The Fed’s push to boost growth now and pay for it later helped bring the price of oil back above $90 per barrel last week, with crude trading today around $93 for West Texas Intermediate. Talk of rising demand in China is driving the rally even as America’s reserves expand with rising domestic production.
And with bond yields popping higher, estimates for GDP growth both here and abroad being revised higher, and the Middle East still a tempest of geopolitical unrest, energy MLPs in general — as tracked by the Alerian MLP Index (INDEX:AMZ) — have continued their bullish trend.
Now, on to the particulars of these stocks.
The trust was formed by SandRidge Energy (NYSE:SD) in May 2011 for the purpose of owning royalty interests in the Permian Basin of Andrews County, Texas. Right now, the yield stands at 13.72%, but you should know the distribution varies based on proceeds the trust receives from actual production values and oil and natural gas prices, less the company’s administrative expenses.
However, PER has shown it can hold its ground despite unstable energy prices, beating forecast payouts by at least 4% every quarter since it initiated a dividend in October 2011. My take is that PER was able to increase its payouts because it’s composed of 80% oil and 20% natural gas, whereas its sister trust, Sandridge Mississippian Trust (NYSE:SDT), which owns energy royalty interests in Oklahoma, is composed of 50% oil and 50% gas.
That seems to have afforded PER more stability, though of course, with such a high yield and a (fairly) newly established dividend, this is a holding for aggressive income investors
Due to some 2012 year-end tax-related selling, PER is actually trading below my original buy-under when I recommended this stock to subscribers two years ago, and at a 7.41 forward P/E, it’s cheaper than most in the sector.
CHKR is a royalty income trust formed by Chesapeake Energy (NYSE:CHK) to unleash value in many of its prime drilling properties in the same way SandRidge Energy has done with SDT and PER. Like PER, CHKR initiated a dividend recently, last March, and it has similar risks. Much depends on the price of oil and natural gas during each quarter, as well as the active hedging program the trust employs.
Like PER, CHKR experienced some year-end selling that has depressed prices, but with oil prices looking strong, the stock is creeping back up.
Even though they’re likely to trade 10% higher into their ex-div dates, I wouldn’t recommend jumping in and out of these for dividend capture. They’re good long-term holdings that are at attractive entry points.
Bryan Perry is editor of Cash Machine, a newsletter focused on dividends and income investing. As of this writing, he did not own a position in any of the aforementioned securities.
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