The market’s recent advance has been slow to spill over into energy stocks; with crude oil still trading around $75 per barrel, there is going to be downside pressure until oil prices begin to recover.
Many energy master limited partnerships that I recommend have defended their franchises during the third-quarter reporting season, citing strong hedging programs, low production cost basis and strong end-market demand that will continue to support the current high yield. But as much as the market wants to believe this commentary, the price action has been weak, suggesting that there has been a general lightening up of MLP exposure amid the weak oil prices.
Conversely, natural gas has rallied from $3.50 per MMBtu to $4.50 per MMBtu, fed by a massive short squeeze in front of the winter weather pattern that is crossing much of the U.S. and pushing temperatures below freezing this week. After a retest of the $4.00 level, natural gas is trading back up to $4.25, a good sign of firmer prices ahead. This amounts to a silver lining for the fracking MLPs, which are crucial to U.S. domestic production of both crude oil and natural gas.
Fracking stocks are under pressure for the moment, along with the larger energy space…but the on-shore horizontal drilling business is enjoying strong growth with a high level of visibility. So, these companies represent good value at current levels and deserve a place in a prudent high-yield portfolio. My Cash Machine subscribers made a quick 68.3% on our position in one fracking MLP, and now I’d like to share my current recommendation in this space.
Cypress Energy Partners LP (CELP) went public on Jan. 15 at $20 per share and quickly found favor with the initial public offering crowd, who ran the shares up to $26 before some profit-taking set in. From speaking with the CFO of Cypress, I was impressed to learn that Cypress garners about a 60% profit margin from pipeline inspection in which 1,700 contractors work in the field. The water disposal and treatment business generates 6% – 8% net margins, so clearly, the inspection side of the business is where the real growth is coming from — and where the tougher EPA regulations are making business so good.
This is a young MLP that has positioned itself to deliver sequential positive top- and bottom-line growth coupled with rising quarterly distributions. The most recent payout, announced on Oct. 31, is 4.06 cents per unit, 4.9% more than the minimum distribution Cypress targets. That payout amounts to an 8.5% forward yield.
At Cypress’ helm is Charles C. Stephenson, Jr., who made energy history when he sold Vintage Petroleum to Occidental Petroleum Corporation (OXY) in 2006 and is considered one of the savviest operators in the industry. Because Cypress runs a business that isn’t tied to commodity prices and is more of a services business, I would expect its revenue and profit trends to be fairly smooth.
Though there is a short history to work with, I think being early in this pick will prove to be a good move. Cypress is set to raise payouts in the coming quarters, and in my view, this will cause Cypress shares to appreciate nicely once the energy sector is able to participate in the market rally.
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. And most recently, Bryan introduced Cash Machine Trader. With this service, he’s increasing the income stream potential even further by using covered call writing strategies to generate yield in the form of option premium — on top of capital appreciation income from well-known stocks.
