6.3% Yield From An Energy Stock Our Expert Loves
A big part of my job as managing editor of StreetAuthority involves talking with our premium newsletter experts to get a sense of what they like in the market, where they think it’s headed and how they plan to help their followers profit.
I want to share some of that wisdom. Starting today I will feature insights and top picks from each of our experts over the next couple weeks as a way of saying thanks for being a StreetAuthority.com reader.
Today’s pick comes courtesy of Nathan Slaughter.
Prior to taking over the reins at High-Yield Investing this summer, Nathan successfully managed three income portfolios at several other StreetAuthority newsletters over the past 10 years. Nathan racked up gains of 45.9% for the positions in his “Yield Maximizer” portfolio in just three years, and even after those gains the average yield was 5.7%. He also managed the “Dependable Income” portfolio from November 2011 to April 2012. In that span, the average return on the positions in his portfolio was 14.8%, and the average yield at the end of the period was 7.1%. And in his “High Income” portfolio, Nathan racked up gains of 61.3% in three and a half years, and the average yield after those gains was 5.5%.
Here’s more from Nathan:
| Nathan Slaughter |
This 6.3%-Yielder Loves Cheap Natural Gas
It’s no secret that the United States is awash in natural gas right now. In fact, the U.S. Department of Energy is forecasting average daily output to surpass 70 billion cubic feet this year. That means between now and December 31, more than 12 trillion cubic feet of gas will be brought to the surface from prolific sources such as Pennsylvania’s Marcellus Shale.
That’s good news for midstream energy companies whose pipeline systems gather and transport all that gas. Surging production also stokes demand for natural gas processors, whose plants “clean” the raw gas by stripping out fluids, contaminants and other impurities.
Williams Partners (NYSE: WPZ) is an industry leader in both aspects, with 15,000 miles of interstate transmission mainline and nearly two dozen processing and treating facilities. The company singlehandedly moves one-seventh of the nation’s natural gas supply through its pipelines.
Even before this energy super-cycle kicked into gear, Williams had already lifted its dividend distributions by 143% since 2006 (to $0.85 from $0.35 per unit) and delivered compounded annual returns of 18.3%. On Tuesday, the company announced a further 9% increase in its dividend to just over 86 cents per unit, payable Aug. 9 to shareholders of record on Aug. 2.
The company is arguably in a stronger position now than ever before. First, most of the heavy spending is in the rear-view mirror, with capital expenditures expected to taper off to $1.8 billion in 2015 from $3.7 billion in 2012. At the same time, new expansion projects are projected to boost annual cash flows by 60%, to $2.7 billion from $1.7 billion.
So profits are rising and capital outlays are falling — leaving a couple billion more on the table for unit-holders. But I’ve saved the best catalyst for last.
Prices of natural gas liquids (NGLs) have collapsed lately, and many companies are cursing. Ethane, for example, is so cheap that in some cases it’s essentially worthless to extract and recover. But if it’s a bad time to be selling this commodity, it’s a great time to be buying.
Williams is cashing in hand over fist. The company’s Geismar petrochemical facility in Louisiana turns inexpensive ethane feedstock into valuable ethylene (a building block to make plastics). This plant is capitalizing on a widening “crack spread” by converting 57,000 barrels of ethane each day into ethylene.
The powerful economics of this commodity environment — coupled with the firm’s growing fee-based income stream — should pave the way for continued dividend hikes (the yield is already 6.3%) and meaningful unit-price momentum over the remainder of the year.
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