5 Electric Sources of Energy Income

by Aaron Levitt | July 24, 2013 8:45 am

oil barrels 185 flickr 5 Electric Sources of Energy Income[1]When investors add an energy component to their portfolio, they often are doing so for capital gains exposure. That’s because many energy stocks simply don’t pay any dividends.

The reason for that is because of high capital spending[2] requirements. The truth is many E&P firms, oil service stocks and other companies in the energy sector often don’t have that much left in the kitty to pay back to shareholders via dividends after they shell out billions searching for new sources of production. It’s getting very expensive to frack a well or drill in ultra-deepwater.

Case in point: The Energy SPDR (XLE[3]) — the broad-based exchange-traded fund covering the energy sector — yields only 1.8%.

While long-term price appreciation is great for a portfolio, investors wanting income from the energy patch are often left out in the cold … that is, unless they know where to look.

And we’re not just talking about the major integrated firms, either. There are plenty of choices for income inside the energy sector, but you might have to look across some relatively unfamiliar names.

Here are five of the best, arranged by yield:

Ensco PLC

Ensco185 5 Electric Sources of Energy Income[4]Dividend Yield: 3.3%

Since its $7 billion purchase of Pride Drilling back in 2011, Ensco (ESV[5]) has quickly become a leader in the deep and ultra-deepwater drilling space. The company owns 70 rigs and currently receives more than half of its revenue from deep-water drilling.

That’s important considering just how expensive deepwater drilling can be; ultra-modern rigs can go for upwards of $600,000 a day to rent. Those high day rates and longer rolling contracts have translated into robust cash flows and made Ensco a dividend machine.

Three years ago, ESV was paying a mere 10 cents annually and yielded just 0.25%. Ensco’s management announced during its earnings call that they are increasing the stock’s quarterly dividend by 33% to 50 cents per share, or $2 annually, pushing ESV’s yield up to 3.3%.

Perhaps more importantly, Ensco’s payout ratio is a low 38%. That means there’s still plenty of cash left to fund operations[6] as well as increase that dividend further.

Baytex Energy

Baytex 185 5 Electric Sources of Energy Income[7]Dividend Yield: 5.9%

As one of the old Canadian royalty trusts (Canroys) that were forced to convert to the C-corp E&P structure a few years back, Baytex Energy (BTE[8]) has been one of the most successful as dividend payer.

Much of that success comes from its production mix, which is extremely liquids-rich. In fact, only 7% of BTE’s production for 2013 will come from dry gas.

The bulk of Batex’s production and reserves are located in the Canadian oil sands and comes from heavy or thermal oil. Recently, the spread between Western Canadian Select (WSC) crude and West Texas Intermediate (WTI)[9] has narrowed significantly — down to about $15 per barrel. Like here in the U.S., WSC crude has been a victim of lacking pipeline infrastructure. But with refiners now willing to move WSC crude via rail, the discount has narrowed.

That will provide extra “oomph” to the company’s cash flows … which, by the way are pretty rich to begin with.

Unlike many of its former Canroy peers, Baytex has been able to maintain its dividend level in the face of low realized prices for WSC crude, with funds from operation more than covering its nearly 6% dividend.

TC PipeLines, LP

TC185 5 Electric Sources of Energy Income[10]Dividend Yield: 6.3%

While its parent TransCanada (TRP[11]) continues to make headlines for its proposed Keystone XL pipeline, TC PipeLines, LP (TCP[12]) continues to churn out steady dividends for unit holders.

Structured as a master limited partnership, TC PipeLines, LP is benefiting from the “drop-down”[13] relationship with its parent. The latest deal has the MLP purchasing additional stakes in two major U.S. gas systems from TransCanada. Adding these gathering systems to TCP’s stable of low-risk infrastructure assets will be immediately accretive to earnings and distributable cash flows for investors.

Already, TCP has been able to establish a strong track record of providing constant and growing cash distributions to unit holders. The MLP has grown its distribution every year for the last 13 years. The additional “drop-downs” should continue the trend.

TCP currently yields an ample 6.3%.

Calumet Specialty Products Partners, LP

Calumet185 5 Electric Sources of Energy Income[14]Dividend Yield: 8.2%

Unlike other refiners, Calumet Specialty Products Partners, LP (CLMT[15]) doesn’t just make gasoline; it produces products such as naphthenic and paraffinic oils, petroleum waxes, petrolatum and hydrocarbon gels. Basically, all the base ingredients used in a variety of industrial applications[16] as well consumer products like Turtle Wax and Goo Gone. That focus puts it into a unique position versus many of its peers.

That unique position also makes CLMT a great dividend play.

Like many other refiners, CLMT’s nine facilities are positioned to take full advantage of Bakken and WTI[17] fuel prices. Meanwhile, Calumet has continuously raised its distribution, including for the recent quarter as well. Management at the MLP recently announced a slight 0.7% increase to its quarterly payout. That bumps the yield to a juicy 8.2%.

BP Prudhoe Bay Royalty Trust

BPPLCLogo 5 Electric Sources of Energy Income[18]Dividend Yield: 12.1%

U.S. royalty trusts — which are different from their former Canadian cousins — generate dividend income from the development of natural resources such as coal, natural gas, and crude oil. These cash flows are subject to the prices of the underlying commodity. If oil is at all-time highs, the dividends will reflect that.

With oil prices hovering above $100 per barrel[19], BP Prudhoe Bay Royalty Trust (BPT[20]) is paying a monster 12% dividend.

The trust — which is operated by British Petroleum (BP[21]) — covers royalties from approximately 150,000 acres of the total 213,500 acres in the Alaskan field. Prudhoe Bay has been churning out steady production since the late 1970s and is one of America’s largest oil fields. That has made PBT a pretty steady dividend payer over the years.

However, keep in mind that royalty trusts do have a finite end date. PBT’s wells are expected to run dry around 2029. At that time, the trust will cease to exist — assuming that advanced drilling techniques[22] can’t pull any extra production from the wells.

Regardless, investors should still have at least 10 years of high dividends to reap.

As of this writing, Aaron Levitt was long CLMT.

Endnotes:
  1. [Image]: http://investorplace.com/wp-content/uploads/2011/10/oil_barrels_185_flickr.jpg
  2. high capital spending: http://investorplace.com/2013/06/make-a-move-on-construction-firm-mastec/
  3. XLE: http://studio-5.financialcontent.com/investplace/quote?Symbol=XLE
  4. [Image]: http://investorplace.com/wp-content/uploads/2013/07/Ensco185.jpg
  5. ESV: http://studio-5.financialcontent.com/investplace/quote?Symbol=ESV
  6. fund operations: http://investorplace.com/2013/07/steer-clear-of-oil-tanker-stocks/
  7. [Image]: http://investorplace.com/wp-content/uploads/2013/05/Baytex-185.jpg
  8. BTE: http://studio-5.financialcontent.com/investplace/quote?Symbol=BTE
  9. West Texas Intermediate (WTI): http://investorplace.com/2013/07/welcome-back-west-texas-intermediate-that-is-black-gold/
  10. [Image]: http://investorplace.com/wp-content/uploads/2013/07/TC185.jpg
  11. TRP: http://studio-5.financialcontent.com/investplace/quote?Symbol=TRP
  12. TCP: http://studio-5.financialcontent.com/investplace/quote?Symbol=TCP
  13. “drop-down”: http://investorplace.com/2013/07/phillips-66-catches-mlp-fever-you-should-too/
  14. [Image]: http://investorplace.com/wp-content/uploads/2013/07/Calumet185.jpg
  15. CLMT: http://studio-5.financialcontent.com/investplace/quote?Symbol=CLMT
  16. industrial applications: http://investorplace.com/2013/07/jump-on-this-shale-play-south-of-the-border/
  17. Bakken and WTI: http://investorplace.com/2013/07/welcome-back-west-texas-intermediate-that-is-black-gold/
  18. [Image]: http://investorplace.com/wp-content/uploads/2010/08/BPPLCLogo.jpg
  19. above $100 per barrel: http://investorplace.com/2013/07/the-surge-in-crude-oil-isnt-over-yet/
  20. BPT: http://studio-5.financialcontent.com/investplace/quote?Symbol=BPT
  21. BP: http://studio-5.financialcontent.com/investplace/quote?Symbol=BP
  22. advanced drilling techniques: http://investorplace.com/2013/07/3-stocks-to-buy-for-a-rig-revitalization/

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