Regular readers know that I like the Energy MLP area for a good portion of my income portfolio. These entities are ideally positioned to piggyback on the impressive expansion of domestic gas & oil production. The space has had a post-election sell-off. However, this appears overdone as the tax status on these entities has amounted to around $1B in tax revenue loss to the government over the past five years. This is a drop in the bucket so hardly a target to change in any changes through tax reform. I particularly like the natural gas gathering, processing and distribution space given the low prices for natural gas, expanding production and the administration's war on coal. One player in the space that warrants consideration to add to one's income portfolio is below. It has dropped just under 10% over the last month and is offering an attractive entry point.
DCP Midstream Partners, LP (DPM) engages in gathering, compressing, treating, processing, transporting, storing, and selling natural gas in the United States.
6 reasons DPM is a good addition to an income portfolio at just over $41 a share:
- The best way to look at Energy MLPs is to focus on operating cash flow (OCF). The company has grown OCF some 60% over the past three years.
- The entity yields 6.6% and has roughly doubled its distribution payouts over the pay seven years.
- Revenue growth is projected to accelerate to over 20% in FY2013 from just under 15% in FY2012.
- The company recently expanded its gas processing capacity in east Texas that serves Eagle Ford Shale region through a joint venture which is rapidly growing production. The output from this arrangement is hedged for any drop in commodity prices for three years and Credit Suisse estimates this transaction will be .24 a share accretive to DPM.
- The 11 analysts that cover the stock have a $50 price target on the stock, decent capital appreciation potential given its robust yield. Credit Suisse also has a $50 price target and an "outperform" rating on DPM.
- The stock crossed into oversold territory on Monday and insiders have been small net purchasers of the shares over the past 18 months.