The energy sector is wildly shifting and traders need to have their eyes wide open and their feet ready for nimble shifting as the market plays out. Currently energy is marked by fierce competition, as well as sharply increasing production capacity and higher operating costs -- both driven by dramatic leaps forward in technology and galloping demand from emerging markets like China, Brazil, and India.
Market factors have resulted in wide disparities in regional crude prices. Limited transportation infrastraucture is leading to regional price imbalances and at times restricted supply, typically leading to higher prices. This seems to be shifting profitability from upstream (producers) to midstream (pipeline and related transportation) and downstream (refining and retail). The industry consists of many big names that garner most of the attention. Yet there are many companies that sail with a lower profile, which have their own attractive investment opportunities. I picked out four of these firms that are lightly followed by analysts but provide strong upside, while also offering solid dividend yields: MPLX LP (MPLX) ONEOK Partners, L.P. (OKS), Williams Companies, Inc. (WMB) and Western Refining (WNR).
An advisement -- several of these businesses are organized in various forms of limited partnerships. Many of them are required to pay most of their earnings in dividends, while others do not. Different partnership forms may bring with them different tax considerations for different investors. Please do additional research and if needed, consult with your tax professional.
Financials: MPLX's recent closing price was $27.22, within a 52-week trading range of $28.30 - $25.35. The company has a dazzling current ratio of 8.3. It has EBITDA margin of 38.81% and gross margin of 53.24%. MPLX has stated that it intends to make a minimum quarterly distribution of $0.2625 per share, for a current dividend yield of 3.9%.
Profile and Recent News: MPLX made its public debut on October 26th of this year after being formed by Marathon Petroleum Company (MPC). The partnership owns, operates and develops oil, refined products and hydrocarbon based product pipelines. MPLX operates and owns a 51% stake in Pipe Line Holdings, another newly formed entity.
In one of the quietest IPOs in years, shares for MPLX opened for trading at $26 after pricing 17,300,000 common units at $22 per common unit. MPLX raised $381 million in gross proceeds in the offering process. Management intends to use the $381 million of gross proceeds of the offering to invest $191.6 million in Pipe Line Holdings. Another $72.9 million will be distributed to Marathon Petroleum Company to reimburse the company for some capital expenditures.
For me, the key feature is that Marathon has set MPLX to start life unhampered by any serious debt. In a world where most midstream energy companies are loaded with debt due to the high Capital Expenditures normally required to be in the business, this leaves MPLX in a great place of higher earnings (through low interest costs) or the ability to quickly reinvest into the business to grow it in this dynamic environment.
ONEOK Partners, L.P.
Financials: ONEOK Partners' recent closing price was $59.47, within a 52-week trading range of $48.48 - $61.58. The company currently trades at a Price to Earnings ratio (PE) of 3.62 with earnings per share of $2.05. ONEOK has a current ratio of 1.64. It has profit margin of 9.39% and operating margin of 10.09%. The company pays a quarterly dividend of $0.33 per share, making an annual yield of 4.40%, with a payout ratio of 69%.
Profile and Recent News: ONEOK is a diversified energy company, which owns 43.4 percent of ONEOK Partners, L.P., and owns one of the nation's premier natural gas liquids systems, connecting NGL supply in the Mid-Continent and Rocky Mountain regions. From the upstream/production side, natural gas has been much more challenging than oil, as prices have been incredibly volatile. However, it has been great for pipeline operators, as increased production means more revenue.
ONEOK reported third quarter 2012 earnings of 78 cents per unit, beating estimates. Despite a marginal rise in total third quarter 2012 net income to $172.5 million from $172.0 million in the year-ago quarter, year-over-year earnings per unit decreased due to an increase in the number of units to 219.8 million from 203.8 million in the prior-year quarter.
The company announced that its 2013 net income is expected to increase 10 percent compared with the partnership's current 2012 earnings guidance. This company should see solidly increasing revenue, earnings and dividends over the next several years.
Williams Companies, Inc.
Financials: Williams' recent closing price was $32.20, within a 52-week trading range of $26.21 -$37.56. The company currently trades at a Price to Earnings ratio (PE) of 72.85 with earnings per share of $0.44. Williams has a current ratio of 1.42. It has profit margin of 3.45% and operating margin of 22.50%. The company pays a regular dividend of $0.3125 for an annual yield of 4.22%, with a payout ratio of 105.4%.
Profile and Recent News: Williams Companies operates pipeline systems extending from Texas, Louisiana, Mississippi, and the offshore Gulf of Mexico through Alabama, Georgia, South Carolina, North Carolina, Virginia, Maryland, Pennsylvania, and New Jersey to the New York City metropolitan area. Williams Cos. plans to spend about C$500 million to C$600 million to fund a new liquids extraction plant and supporting facilities amid a new long-term gas processing agreement with a producer in the Canadian oil sands.
Williams Companies has a management plan to grow its dividend 125% from 2011 to 2014. It is already well on its way to achieving its goal.
Western Refining, Inc.
Financials: Western Refining's recent closing price was $25.79, within a 52-week trading range of $11.17 - $28.04. The company currently trades at a Price to Earnings ratio (PE) of 19.99 with earnings per share of $1.29. Western Refining has a current ratio of 1.90. It has profit margin of 1.40% and operating margin of 8.58%. The company pays a cash dividend of $0.08 per share, turning into an annual yield on the dividend of 0.90%, with a payout ratio of an incredibly conservative 15%.
Profile and Recent News: Western Refining operates in three segments: Refining Group, Wholesale Group, and Retail Group. As of February 24, 2012, the company operated 210 service stations with convenience stores or kiosks under the Giant, Mustang, Sundial, and Howdy's brand names in Arizona, New Mexico, Colorado, and Texas; and a fleet of crude oil and refined product truck transports.
The company announced a repurchase up to $200 million in shares and to double its cash dividend to 8 cents a share during the third quarter. The refining company reported third quarter 2012 net income, excluding special items, of $105.2 million, or $0.99 per diluted share. Total debt as of September 30, 2012 was $495.8 million and cash was $509.8 million.
The company has been restructuring. In the past 12 months, Western Refining has reduced total debt by $566.6 million. The dividend may be low by yield, but that is because the share price has advanced aggressively as the dividend has risen the last two years. I expect revenues will continue to remain strong, but earnings to increase sharply as the company's debt continues to lower. Dividends should accelerate, which should make for outstanding future total returns.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.