"Much ingenuity with a little money is vastly more profitable and amusing than much money without ingenuity." - Arnold Bennett
This is the third of three articles (I, II) looking at the huge changes fracking and other drilling technologies have brought to the economy as these technologies have triggered a huge energy boom throughout the country.
The ingenuity unleashed by wildcatters, oil services concerns and E & P plays has been impressive. Oil production is up almost 55% domestically in the past five years and the country now has by far the lowest natural gas prices in the developed world.
What is especially impressive is that has happened despite natural gas production on Federal Lands being down by a third since 2007 and oil production also posting a decline there as well; albeit smaller. Almost all government investment in energy over this time frame has been allocated to renewables; mainly solar & wind.
It seems nothing, not even the Federal Government, can stop the United States on its way to energy independence and becoming the largest oil & gas producer in the world.
I still believe we are in the early innings of this game changing development. Given I expect the market to be flat to slightly up in 2014, I am allocating additional funds to high yield energy plays riding this boom. Here are two names I am adding additional funds to on pull backs in the market.
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.
The recent dramatic rise in natural gas prices naturally will provide a long term lift if rise means a higher price range for natural gas prices in the medium term. The stock surged over five percent on Thursday as the company announced 4% sequential bump to its distribution (up 21% Y/Y) and also said it was moving to a monthly payout from a quarterly one.
Noted value investor Leon Cooperman has an over 10% stake in Atlas and other insiders have been net buyers of the stock over the last year as well. With the new dividend increase the shares will yield ~10.5% and Atlas has raised its payouts by over 40% now after coming public in 2012.
Revenues are increasing rapidly. Sales are tracking to almost 80% gains in FY2013 and analysts believe another 50% gain is in store for FY2014 as well. This is starting to flow down to the bottom line. Atlas lost $1.13 a share in FY2012 but it should reduce the loss to 60 cents a share in about to close FY2013. Analysts project Atlas will be ~50 cents a share in the black in FY2014. It should be noted Atlas is already profitable on an operating cash flow basis.
BreitBurn Energy Partners (BBEP) is another oil & gas E&P concern organized a MLP which came public in 2006. The company has mature long-lived reserves and has grown through acquisitions as well as organic growth.
Revenue growth is impressive with the company set to post better than 65% revenue gains in the about to close fiscal year and analysts believe another 30% increase is in store. Breitburn recently spent some $280mm to buy acreage in the Permian that is producing some 2,900 BOE/D (Barrel of Oil Equilavent/Day), has a 15 year reserve life, is delivering production that is 60% oil and ~300 potential drilling locations. This is the sort of strategic acquisition that Breitburn excels at.
Breitburn went to a monthly distribution payout to start 2014 and pays an almost ten percent (9.6%) annual distribution yield. Like Atlas, revenue growth is starting to flow directly to the bottom line. After losing 56 cents a share in FY2012, Breitburn is marching toward an almost 50 cent a share profit in FY2013 and analysts believe the company will post better than $1 a share in EPS in FY2014.
I hold both of these partnerships in my income portfolio. I expect them both to outperform what I expect to be a flat to slightly up market in 2014. If the recent spike in natural gas prices turns out to be more than a temporary spike, this would be an additional positive catalyst for both companies.