The precipitous drop in crude oil prices, from over $100 a barrel this summer to about half that currently, has gutted the energy sector.
Consider the Energy Select Sector SPDR (ETF) (XLE), down 9% year-to-date in 2014 and off more than 20% from its summer highs. Key components like Anadarko Petroleum Corporation (APC) and Pioneer Natural Resources Company (PXD) are down even more.
But keep in mind that most investors aren’t day-trading commodities. And while some of these energy stocks have been battered, there are a host of low-risk, long-term plays that should continue to serve investors well regardless of short-term volatility in crude oil prices.
The best option? “Toll-taker” MLPs that are insulated from commodity fluctuations thanks to their nature as middlemen in the energy market, guaranteeing a strong baseline business and reliable dividends to shareholders.
Here are three such MLP plays with big dividends that I’m watching right now:
High-Income Oil Stocks: Williams Partners L.P. (WPZ)
Market Cap: $19.4 billion
YTD Performance: -14%
Yield: 8.5%
An energy infrastructure play, Williams Partners L.P. (WPZ) operates gas pipelines around the U.S. and Canada. This so-called “midstream businesses” is insulated from the volatility we have seen lately in crude oil prices, because energy companies that extract oil and natural gas from the ground still need to use WPZ pipelines to move it downstream to refiners and ultimately retail and wholesale outfits.
Like many MLP investments, Williams doesn’t have a fixed dividend and can see modest fluctuations quarter to quarter and year to year. However, the fluctuations have all been quite nice lately as the dividend has actually marched higher each of the last four quarters to almost 93 cents a share versus about 88 cents a share at the end of 2013 and just63.5 cents at the beginning of 2010.
That kind of change is certainly a good thing for investors.
Based on the last four quarters of payouts, the current yield on cost for this MLP is a whopping 8.5%. While the drop in crude prices could hurt distributions in the short term, this company is clearly an income powerhouse.
And note that long-term performance is actually more sleepy then depressing; WPZ has a beta of just 0.3, meaning it “wiggles” much less than the market at large. In the last five years, shares are up 45% to underperform the 85% or so delivered by the S&P 500 — but when you bake in dividends, the total return jumps to more than 100%.
Long-term dividend investors should consider taking a position in this MLP for the long-term on the recent pullback.
High-Income Oil Stocks: Energy Transfer Partners LP (ETP)
Market Cap: $22.2 billion
YTD Performance: 9%
Yield: 6.2%
Energy Transfer Partners LP (ETP) is another great MLP to consider. Like Williams, ETP is a midstream business that is simply taking fees from transportation and storage. But a big plus is that Energy Transfer Partners LP focuses mainly on natural gas and not crude oil, providing even more stability.
That’s why this stock has managed to mostly track the market even while other energy stocks have imploded; the natural gas space continues to soar thanks to fracking fueling supply and cheap prices for natural gas fueling strong demand.
Sure, ETP shares haven’t gone crazy in the last few years, trending up just 42% since the start of 2010, however the payouts have been super steady — and the reliable 6.2% yield is roughly than three times a 10-year T-Note right now.
Energy Transfer Partners is one of the biggest in the space, with operations all around the country. It’s not content to rest on its laurels, however, with ETP growing fast. Consider its recent project to build an ambitious 820-mile pipeline connecting processing facilities in the Marcellus and Utica shale fields and an April agreement to buy Susser Holdings Corporation (SUSS) as proof of aggressive expansion.
If you’re looking for a stable, natural gas play with big yields to steer clear of direct exposure to crude, you could do much worse than ETP right now.
High-Income Oil Stocks: NuStar Energy L.P. (NS)
Market Cap: $4.4 billion
YTD Performance: 10%
Yield: 7.8%
NuStar Energy L.P. (NS) is another a glorified toll-taker on the energy highway. It’s not a sexy business, to be sure –but while exploration stocks get a lot of press for hard-charging “wildcatters” searching for new energy finds, there’s a lot of risk to that kind of business as well if you don’t strike a big find.
NuStar has been hampered since the Great Recession by a bigger borrowing costs, with NS long-term debt jumping from $1.9 billion in 2011 to $2.6 billion. But the company has been busy restructuring for the last year or two, including spinning off its asphalt business this year in order to focus itself on midstream operations, which are the big driver of its dividends.
In fact, thanks to these moves and others, NuStar has surged almost 50% from its lows in September of 2013 while the broader market has only tacked on about 20% in the same period. Not bad, considering how hostile the market has been to oil and energy stocks lately!
NuStar continues to see strong cash flows that more than cover the hefty distributions of 7.8% at current pricing. And its important to note that despite restructuring efforts, that payout has been consistent — squeaking up from $1.07 per quarter in 2009 to just $1.10 currently, even across some rough times.
If cash flows remain strong than future increases in distributions could be likely, making the already juicy payouts even nicer in the years ahead as this company continues to adapt and evolve.
Jeff Reeves is the editor of InvestorPlace.com and the author of The Frugal Investor’s Guide to Finding Great Stocks. As of this writing, he did not hold a position in any of the aforementioned securities. Write him at editor@investorplace.com or follow him on Twitter via @JeffReevesIP.
