I believe natural gas will be America’s energy salvation. I’ve previously discussed my favorite natural gas exploration and production firms and my top natural gas (and oil) pipeline companies. But every portfolio needs diversification to mitigate risk and/or short-term under-performance in any one sector or industry. I’d like to find good solid income, if I can, in the food, other-than-natural-gas energy, and basic materials sectors.
A number of SA contributors believe, as I do, that a steadily-increasing stream of dividend income is a key component of total return. Many advisors suggest buying a good solid company that pays 2% -- but with the likelihood of increasing that dividend year after year. My variation on that is to find a good solid company that pays 8% -- and with the likelihood of increasing that dividend year after year. I provided a chart of the increasing payout for the past 12 years from one such company, OneOK (NYSE:OKS), in the second of the two articles cited above. Let’s see if we can’t find others that might provide the same kind of steady growth in other sectors.
The first one that comes to mind is Natural Resource Partners (NYSE:NRP). From its website:
Natural Resource Partners L.P. (NRP) is a master limited partnership that is principally engaged in the business of owning and managing coal properties, and coal handling and transportation infrastructure in the three major coal producing regions of the United States: Appalachia, the Illinois Basin and the Powder River Basin. NRP also owns and manages aggregate reserves in West Virginia and Washington. In addition the partnership manages oil and gas properties and timber assets in Appalachia.
The partnership does not actively engage in the mining of any of its minerals or natural resources, but rather leases its properties to various operators in exchange for royalty payments.
I’ve owned NRP for years. It IPO’d in October 2002 and I believe I bought it early in 2003. My first full year of ownership the units paid me something like 97 cents each in distributions. Today that figure is $2.14, for a 10.6% yield. There is speculation that, if there is a warm winter or if natural gas prices (which coal tracks in order to stay competitive) remain low, NRP may have to reduce its distributions until prices increase again. That makes this an excellent time to buy. If they reduce their distribution, I’ll buy more shares. Long term, this is a rock-solid company and long term, I don’t see energy getting and staying any cheaper. NRP is organized as an MLP.
I already discussed Penn Virginia Resources (NYSE:PVR) in the 2nd article I alluded to at the beginning. That’s because 37% of their income is from their midstream natural gas gathering and processing business. But if you didn’t like them as a natural gas play, consider them for the other 63% of their business: like NRP, PVR manages coal and natural resource properties.
They don’t do any mining and therefore avoid the union issues, health issues, and catastrophic accident issues that operators must insure against. They own the properties and mineral rights and lease the right to mine to others. At its current $17, PVR yields 11% and boasts a great distribution increase history. PVR is organized as an MLP.
(As for that “warm winter”, no offense to meteorologists, who get second-guessed by more people than even SA contributors, but I observe the animals, which I have found to be a more consistent indicator of winter weather than the humans – they’ve been at it longer. Here at 6,840 feet at Lake Tahoe, you’d better look up as you walk among the Ponderosa and Jeffrey Pines. The squirrels are gnawing through branches and dropping pine cones, stripping them for their nuts, and burying them everywhere. They are joined by the birds, bees, bears and every other creature that needs to store either food or fat for the winter. And this is September and it’s 75 degrees out there. We’ll soon know – more of that empirical observation stuff that is so out of fashion in these days of high-volume rhetoric and polemic…)
Teekay Offshore (NYSE:TOO) provides marine transport and storage services to the offshore oil industry. I think offshore is where we will find the next elephant fields (sorry “the sky is falling” advocates – there’s more oil and gas to be found than you imagine. Every year I’ve been in this business – that would be nearly 40 years – someone has been running around screaming we are running out of oil and gas and every year we find more.) TOO specializes in shuttle tankers, which shuttle oil and condensates from offshore oil fields to onshore terminals and refineries. This is a pipeline alternative for areas where pipelines might be too expensive or impractical. TOO owns 36 of these shuttle tankers, five Floating Production Storage and Offloading vessels (FPSOs), and nine conventional crude oil Aframax tankers. Their FPSOs are deployed to the Norwegian and UK Continental Shelves and Brazil. All their production units are under long-term contracts producing for oil and gas companies like Canadian National Resources (NYSEMKT:CNR), BP, Statoil (NYSE:STO), and PetroBras (NYSE:PBR). The company’s shares yield 11%.
Unlike NRP and PVR, TOO is a C-Corporation, so you will receive a 1099 for any dividends, not a K-1. Distributions will be treated as a dividend for tax purposes to the extent it comes from earnings and profits and as a return of capital to the extent it exceeds earnings and profits.
You can’t have food without fertilizer. Well, you can, but as any home gardener knows, it will be scrawny and the yield will be smaller. You need good rich soil to provide all the nutrients plants need. Plants need more than a dozen elements to grow. Three —carbon, oxygen, and hydrogen—can be taken from the air and from water. But the others typically come from the soil. And nitrogen may be the most important. Nitrogen is an essential component of the proteins that build cell material and plant tissue. In addition, it is necessary for photosynthesis. Plants without sufficient nitrogen typically show stunted growth and yellowish leaves.
Terra Nitrogen (NYSE:TNH) is an MLP consisting of a nitrogen manufacturing facility and terminal operations. Parent Terra Industries (TRA) owns about 75% of the outstanding common units of TNH, and the remaining 25% are held by the public. Unlike NRP and PVR, and to a lesser extent TOO, TNH distributions can fluctuate a great deal from year to year. The amount of the distribution cash depends on, among other factors, profitability, working capital changes, capital spending and future cash needs. That’s not too different from other MLPs but while energy usage is pretty constant, nitrogen usage is not. Farmers may choose one year to burn and/or plow under one crop and rotate to a different type whereas the next year they’ll need to buy nitrogen fertilizer. If you want good distributions, consider TNH. If you want steady distributions, consider the others first. The units currently yield 8.5%.
Finally, while I am not usually a fan of financial services firms, Blackstone Group (NYSE:BX) may be the exception. BX is a publicly-traded private equity firm that owns stakes in more than 40 companies, manages hedge funds and mutual funds, and provides mergers and acquisitions and restructuring advice to corporate clients. Since I’m thinking there’s going to be a LOT of corporate debt restructuring in the next couple years, I imagine Blackstone will get their fair share of this – regrettably – growing business.
BX has four primary businesses:
- Private Equity, with six such funds open to accredited investors. This unit specializes leveraged buyouts, start-up businesses in established industries, minority investments, corporate partnerships, distressed debt, structured securities and industry consolidations, as they say “in all cases in strictly friendly transactions.
BX manages six US real estate funds, two international real estate funds, a European real estate fund and a number of debt-focused real estate funds. Our real estate funds have made significant investments in lodging, major urban office buildings and a variety of real estate operating companies. Real estate doesn’t look great right now but all things are cyclical.
- Credit and Marketable Alternatives: Includes funds of hedge funds, credit-oriented funds, collateralized loan obligation vehicles and two publicly-traded closed-end mutual funds -- The India Fund, Inc. (NYSE:IFN) and The Asia Tigers Fund, Inc (NYSE:GRR).
This segment includes corporate and mergers and acquisitions advisory services, restructuring and reorganization advisory services (since 1991, they have advised on nearly 250 distressed situations involving $1 trillion in total liabilities.
BX is organized as an MLP and currently yields 8.5%.
As always, consult your own tax advisor to determine the appropriate tax treatment with respect to all these distributions.
Full Disclosure: Long NRP, PVR, TOO and BX.
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