Investors’ hot-and-cold-running love affair with oil and natural gas is running cold at the moment.
West Texas Intermediate Crude (WTIC) is down 13% in the past two weeks. Investors are worried demand could slacken in the Far East following the hard sell in Chinese equities. Concurrently, they’re worried Iran could swamp the market with crude once economic sanctions are lifted.
As for the other major liquid fuel, natural gas, it continues to hover near 2015 lows. The outlook for a temperate summer and a mild winter, coupled with stockpiles above their five-year average, has investors thinking natural gas prices are going nowhere fast.
That’s today’s sentiment. Tomorrow’s could be – and likely will be – different. Investor ardor for energy can turn in a New York second. WTIC at $35 a barrel in March 2009 blossomed to $70 a barrel three months later. Natural gas at $2.70 per million BTUs in September 2010 spiked to $6 per million BTUs by December.
As the price of energy goes, so goes the price of energy companies. Most are priced low, and that’s pushed yields high. Time to buy, if you know what to buy.
Calumet Specialty Products Partners LP (NASDAQ: CLMT) is one for the short list. It yields over 10%. Just as important, the distribution that supports that yield is rock solid.
Calumet refines oil and manufactures an array of high-end waxes and lubricants. Calumet has been a tough sell for the past year. I see a safe high-yield distribution, but many analysts contradict my opinion. Calumet’s units are depressed because many investors have been led to believe a distribution cut looms. Why the belief persists is a mystery.
Calumet continues to generate plenty of cash. In the first quarter of 2015, it generated $125 million in EBITDA (earnings before interest, taxes, depreciation and amortization) compared to $83 million in the year-ago quarter. More important, distributable cash flow – which pays the distribution – came in at $94.1 million compared to $49.4 million a year ago. Calumet’s distribution coverage ratio was 1.6 times in the first quarter versus 0.9 times last year at this time. The distribution isn’t going anywhere.
Better still, management has hinted a distribution increase could be imminent now that recent acquisitions generate cash flow to support a higher distribution. A regular and growing distribution is exactly the kind of one-two punch everyone needs for really building wealth. However, you can be sure Calumet’s low-priced units won’t remain low priced when a distribution increase is announced.
Those easily frightened have also steered clear of Energy Transfer Partners LP (NYSE: ETP). ETP owns one of the largest networks of pipelines and storage facilities in the country. It also runs a large retail gasoline operation with its 5,000 Sunoco outlets.
ETP units yield close to 8%. Many investors appear to be oblivious to the fact that ETP has morphed into a high-yield distribution grower. Seven quarters have brought seven distribution increases.
I see more increases ahead, because I see a stable business model. I like ETP because it distances itself from oil-and-gas price volatility. ETP can charge a basic fixed fee that’s independent of volume and market price. It can also set prices based on the price and volume of the oil and gas it handles.
Given ETP’s distribution performance in the face of the energy-price route that occurred late last year, you can argue that it has deftly found the right pricing mix. ETP maintains and grows its distribution whether energy prices are rising or falling.
Sustainable high yield and high-yield distribution growth. Better yet, sustainable high yield and high-yield distribution that are on sale. What more can an income investor ask from two energy MLPs?
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