I continue to find value in the energy sector despite the market being at record highs (S&P and Dow Jones). I particularly like the high yielding Master and Limited partnership space within the energy complex. These entities provide significant income as well as capital appreciation potential.
Although "Tapering" from the Federal Reserve firmly on the table, the rise in yields seems to have temporarily plateaued over the past couple of weeks after a significant rise since May. In this low yield environment within a fairly/slightly overvalued market; these high income energy plays provide solid value at current levels. Here are two of these plays that provide high yield and have attractive valuations.
Atlas Resource Partners (ARP) is a master limited partnership (MLP) active in oil and gas production in the Barnett Shale in Texas, the Appalachian Basin and in the Mississippi Lime in Oklahoma. ARP owns an interest in over 8,600 producing natural gas and oil wells, representing over 700 Bcfe of net proved developed reserves. This has been a core holding within my income portfolio all through 2013.
This is also a core holding of noted value investor Leon Cooperman who just disclosed he now has a ~11% stake. This MLP also currently pays a robust distribution yield of 11.5%. Despite some concern about the sustainability of upstream MLPs' cash flow, Atlas has increased distribution payouts frequently and by a total of 40% cumulatively since coming public in 2012.
Insiders have a significant stake in this entity and they bought over $1.5mm new shares at slightly higher prices in June. Thanks to acquisitions and organic growth, revenues should be up over 80% this fiscal year and analysts believe another ~50% increase is in the cards in FY2014.
Seadrill Partners (SDLP) is a limited liability company formed as a wholly owned subsidiary of Seadrill Limited (SDRL). Seadrill Partners owns, acquires and operates offshore drilling rigs. The stock recently dipped as the company is doing a secondary to raise funds to acquire two additional semi-submersible drilling rigs. Over the long run these purchases should add to cash flow and distribution growth.
One of the attractions of Seadrill Partners is that its portfolio consists of a "young fleet that's highly contracted with major oil companies and anticipates a long runway of attractive distribution growth driven by dropdown acquisitions from parent Seadrill" which were the drivers behind Global Hunter initiating the shares as a "Buy" earlier in the year.
SDLP has a 5.3% yield and the company has already made a couple of small distribution payment hikes since coming public late in 2012. The company is showing solid revenue & earnings growth and the average contract duration for its rigs are just four years. In addition, the potential for further dropdowns from its parent should continue to bolster growth for the foreseeable future.