The energy sector was hard to beat for much of the year — but it has struggled to maintain its top-dog status as oil and gas prices slid lower all summer long. With West Texas Intermediate crude now trading for less than $95 per barrel and natural gas stalled out just under $4 per MMBtu, many energy stocks have suffered heavy selling even as the broad market is hitting all-time highs.
But I’m happy to report that one group has held up much, much better than most oil and gas companies, and that’s the MLPs.
Despite the declining prices, energy MLPs have actually traded higher in the past several sessions. I chalk it up to proactive hedging on the part of astute management teams who locked in future prices when crude was trading at or above $105 per barrel and nat gas was trading in the mid-$4s per MMBtu.
It’s also clear that yield matters … and matters a great deal. After all, the companies making up the Energy Select Sector SPDR ETF (XLE) — which pay 1.7% yields on average –– are now barely outperforming the S&P, while the Alerian MLP Index (AMZ) with its 5%+ yields has nearly doubled the S&P’s year-to-date gain.
With that in mind, it’s time to look past the traditional energy plays like Chevron (CVX) and ExxonMobil (XOM) and make sure you have a decent weighting in MLPs, especially those involved in the booming export business. Here are the top 2 names I’m recommending this week.
Capital Product Partners LP (CPLP)
One of my top energy MLPs is Capital Product Partners LP (CPLP). Formed in 2007, Capital Product Partners is an international diversified shipping company. It’s involved in seaborne transportation of oil, refined oil products and chemicals as well as dry cargo and containerized goods. It offers medium- to long-term, fixed-rate time and bareboat charters — and for very nice margins.
I love this kind of story, because I’m enamored with transportation — it’s one of those businesses that is not going away, and it’s hard to replace, so the barriers to entry are high. Plus, the Greeks have had a long history of being some of the best operators in the industry. And CPLP, unlike a lot of the shipping stocks, was able to hit a new high in July, doing so with very strong growth and excellent distributions. So I’ll take that 8.5% yield and look for capital gains to help bolster the total return.
Teekay LNG Partners LP (TGP)
As the world’s largest carrier of liquefied natural gas (LNG) to export markets, Teekay LNG Partners LP (TGP) is among the biggest beneficiaries of a secular trend that is still in its very early stages.
For the second quarter, TGP reported net earnings of $0.56 per share, a bit light of the $0.60-per-share estimate. However, year-over-year distributable cash flow increased by 11%, to $81.5 million, and the company declared a quarterly distribution of $0.6918 per unit, for a current yield of 6.4%. During the quarter, TGP acquired ownership interests in four LNG carriers from BG Group (BRGYY) and took delivery of two new LNG ships.
The increase in TGP’s fleet will provide for future growth in distributable cash flow that is centered on China-based partners for liquefied natural gas delivery, through a 50/50 joint venture with China LNG Shipping. This arrangement goes out to 2045 and shows just out far out companies are willing to go to strike long-term deals that secure fixed shipments of the fossil fuel of the future.
Bryan Perry is the editor of Cash Machine, a newsletter focused on high-yield income investing with the goal of maintaining a blended total yield of 10% across two portfolios. Bryan is also the editor of Extreme Income, which uses the power of historically cheap money to create a leveraged “baby hedge fund” strategy that paves the way to massive profits and up to 4x greater income.
