By: Ahmed Ishtiaq
Investment in master limited partnerships is a great way to collect dividends. By definition, a master limited partnership should derive almost 90% of its cash flows from commodities, natural resources or real estate. MLPs enjoy certain tax benefits; the partnership does not pay company-level taxes, instead the taxes are paid at the unit holder level. In this article, we have identified three partnerships working in the energy sector.
Energy partnerships are constantly expanding due to the oil and gas boom in North America. In the past three years, MLPs have averaged 27%, compared to 16.4% for the S&P 500. The partnerships have flourished due to low correlation with the global credit, banking and real estate crisis.
Furthermore, financial stocks are another attractive source of income. For this article, we decided to pick two master limited partnerships operating in the energy sector and one financial stock. All of these stocks offer a dividend yield of over 10%, and trade at attractive multiples.
BreitBurn Energy Partners
BreitBurn Energy Partners (BBEP) acquires, develops and produces oil and natural gas in the United States. In the past, the company focused more on oil. However, more recently, it has expanded production levels and 55% of its production is weighted to natural gas. An increase in production of gas can be a negative for the company in the current market conditions.
- At the moment, the partnership distributes $0.4650 per share to its shareholders on a quarterly basis. At current levels of cash distributions, the dividend yield of the company stands at 10.23%. This is a mouth watering yield figure, keeping in mind the current level of interest rates.
Cash flows of the partnership are in solid condition. At the end of 2011, BreitBurn generated $129 million in cash flows from operations. However, during the previous twelve months, cash flows from operations have gone up to $166 million.
BreitBurn paid $103 million in cash distributions during 2011, and $121 million during the past twelve months. However, capital expenditures have been substantially high for the company in the past two years. As a result, free cash flows were negative $288 million during 2011 and negative $509 million during the last twelve months.
Eagle Rock Energy Partners
Eagle Rock Energy Partners (EROC) operates in both the midstream and upstream segments of the oil and natural gas industries. The midstream operations include 5,200 miles of pipelines in Texas, Louisiana, and Gulf of Mexico and 18 processing plants. The upstream operations consist of 321 productive wells in Alabama and Texas.
Revenues are solid for the company, and over the past three years, revenues have grown at an impressive pace. At the end of 2011, the partnership recorded revenues of $1.06 billion. However, revenues for the trailing twelve months have come down slightly and stand at $892 million.
Eagle Rock currently pays an annual dividend of $0.88 per share, yielding 10.13%. The partnership has a history of consistently increasing cash distributions. However, for the past three quarters, cash distributions have been stagnant.
During the past twelve months, the company has recorded a loss of $121 million. However, the loss mainly arises from non-cash expenses such as depreciation and amortization, and asset impairments. The partnership has charged $124 million in investment/asset impairments in the trailing twelve months.
Adjusting the cash flows for these non-cash charges, the partnership generated $145 million in cash flows from operations during the previous twelve months. Cash distributions have also increased and currently stand at $112 million, compared to $75 million at the end of last year. On the other hand, capital expenditures have caused the free cash flows to be negative. Trailing twelve months free cash flows stand at -$158 million.
BlackRock Kelso Capital Corporation
BlackRock Kelso Capital Corporation (BKCC) is a private equity firm that invests in middle market companies mainly through debt equity securities. The company was formed as a joint venture between BlackRock, Inc. and Kelso & Company, and is externally managed by BlackRock, Inc. The company typically invests between $10 million and $50 million in companies in a variety of industries.
Revenues for the company have shown an impressive growth over the past three years and currently stand at $126 million.
At the moment, BlackRock pays an annual dividend of $1.04 per share, yielding 10.48%. The company has not increased its dividend for the last seven quarters when it slashed the dividend by $0.04.
Cash flows from operations were negative for BKCC during the past twelve months due to a provision for credit losses. The company charged $145 million in the provision for credit losses in the trailing twelve months, which resulted in negative operating cash flow of $24 million.
The company paid $70 million in dividends during the last twelve months, a decline of $7 million from the last year.
High dividend yield is an extremely attractive element for investors at the moment. During the past year, high yielding stocks have been some of the best performers in the market. We believe these three stocks provide an attractive opportunity to collect heavy cash distributions. These companies have a solid history of cash distributions and the energy sector is prospering at the moment. Income hunting investors should take a look at these three picks for their portfolios.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.