- Yield should be a much more important component of overall return in 2014 than in 2013.
- The huge domestic energy boom continues to provide good opportunities for investors.
- Below are two high yielding energy names that were upgraded by analysts today and look attractive at current levels.
"Luck is what happens when preparation meets opportunity." - Seneca
Most regular readers of these columns know that I am very cautious on the markets right now after 2013's over 30% rally in equities. I believe we will spend most if not all of 2014 consolidating these gains and adjusting to the Federal Reserve's efforts to slowly to back away from liquidity measures intended to bolster the market and lending.
My own outlook is for the market to return between a negative 5% to positive 10% for the year including dividends. In addition, yield should be a much bigger component of overall return than it was in 2013.
I also continue to be focus keenly on the opportunities that continue to unfold due the huge domestic energy boom that is ongoing in North American thanks to "Fracking" and other advanced drilling technologies. Looking at the overlap of these two focus areas, here are two high yield energy names that were upgraded by analysts today that are worth considering at present levels.
Alon USA Partners, LP (NYSE:ALDW) limited partnership formed in August 2012 by Alon USA Energy, Inc. (NYSE:ALJ). Alon Partners owns and operates a crude oil refinery in Big Spring, Texas with total throughput capacity of approximately 70,000 barrels per day.
Alon USA Partners was upgraded by Citigroup today which went from a "Neutral" rating to "Buy", and raised the price target from $16.00 to $19.00. Citicorp's analyst cited Alon's "Expectations of faster growth from the Delaware and Midland basins in 2014 and slower ramp-up in the Permian pipeline projects have presented an opportunity for ALDW to capitalize over the near to intermediate term." In addition, Citi's analyst expects distribution payouts to grow 25 to 40 cents a share this year and 25 cents a share in FY2015.
The entity pays a very variable quarterly payout and has only been public since late 2012. Based on the total of the three payouts made in 2013, the shares yield over 15% at current prices. It should be noted that Alon skipped its last distribution payout in 2013 and paid only 18 cents a share during its last payout in February.
The company met bottom line earning expectations and easily beat top line consensus when it reported earnings earlier in the month. The shares are cheap, but volatile, at ~7.5x trailing earnings. The median price target by the four analysts that cover the shares is $19 a share, more than 15% above the current stock price.
Emerge Energy Services (NYSE:EMES) is a diversified energy services company that operates in two key segments of the energy industry: Sand Production and Fuel Processing and Distribution. It is structured as a limited partnership.
Bank of America reiterated its "Buy" rating on Emerge Energy and upped its price target to $61 a share from its previous price target of $50 a share. BofA's analyst noted "We maintain our 2014 distribution estimate at $4.30 per unit for Emerge, above guidance of $3.80-$4.00 as we expect accelerating frac sand demand. Our 2015 distribution estimate increases to $6.35 per unit from $4.75 and is more than 50% higher than annualized 4Q13. Emerging pricing power for frac sand provides further upside."
This entity came public in May 2013 and has already provided two impressive bumps in its distribution payout. The shares currently yield 7.5%. If BofA's analyst turns out to be correct on future distributions, it will yield more than 11.5% at current levels by the end of FY2015. After breaking even in FY2012, Emerge is tracking to ~$1.85 a share in earnings in FY2013 and the consensus calls for over ~$3 a share in FY2014. Revenue growth is projected to come in at over 25% in the coming fiscal year.
Disclosure: I have no positions in any stocks mentioned, but may initiate a long position in ALDW over the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.