Nothing Wrong With Getting A 10% Yield In Energy

Includes: BBEPQ, CLMT
by: Bret Jensen


The rotation from momentum names into value names continues in the market.

High yield plays with reasonable valuations have held up extremely well while highflying stocks and sectors have cratered.

This migration could very well continue for some time. Profiled below are two attractive high yield plays in energy.

Over the last few days I have highlighted the "Great Rotation" currently going on in the market as well as advocating for high yield plays with reasonable valuations as safe ports in the storm.

Both the NASDAQ and the small cap Russell 2000 are now down some 6% from their highs in March. A correction, a pullback of at least 10%, certainly seems like a distinct possibility.

I will continue to err on the side of caution in allocating funds within my own portfolio. Right now I have more of my new funds going into the income side of the ledger. In a market that will be extremely fortunate to reach an overall return of 10% in 2014 - and quite possibly much less - high yield at a reasonable cost seems the way to play this latest hiccup in equities.

I still continue to find value in the energy sector due to the continuing domestic energy boom occurring in the U.S. Below are two 10% yielders I own in the energy partnership space.

BreitBurn Energy Partners L.P. (BBEP) is an independent oil and gas master limited partnership, focused on the acquisition, exploitation and development of oil and gas properties for the purpose of generating cash flow to make distributions to their unit holders. Breitburn has producing crude oil & natural assets located throughout the country including Wyoming, Texas and California.

Recently the company has expanded its presence in the fast growing Permian Basin. Revenue should grow better than 35% this year. Breitburn recently did a secondary to pay down debt and should probably see sales grow at a more sustainable ~10% annually starting in FY2015.

The shares yield almost ten percent (9.9%). Breitburn has grown its distribution payout incrementally and consistently over the past few years after they had to cut the payout slightly during the financial crisis. Starting this year, the company also moved to paying its payout monthly from quarterly. The company has doubled operating cash flow since the end of FY2011 and BBEP goes for ~9x operating cash flow.

Calumet Specialty Products Partners (NASDAQ:CLMT) is organized as a limited partnership and produces specialty refined hydrocarbon products in several facilities with a ~160,000 barrels per day of capacity.

Calumet is a high yield play with a solid growth component. The refiner has approximately $500mm in new projects that should be completed by early 2016. This should boost EBITDA by another $190mm to $215mm when these projects are done. Calumet also recently broadened its reach into delivering energy products by buying a small drilling fluid player. The company will now have a deeper reach into the fast growing E&P concerns that will now be its clients.

These events should show up in earnings in coming years. The company did a little better than breakeven in FY2013. However, consensus has it earning ~$1.40 a share in FY2014 and over $2 a share in FY2015. The shares yield just over ten percent (10.2%) and the company has raised its quarterly payout consistently since 2008. The stock also has a five year projected PEG of under 1 (.85), rare for a high yielder.

Both of these income plays should do fine in a flat or down market. In addition to their high yields and reasonable valuations, both have lower betas than the overall market.

Disclosure: I am long BBEP, CLMT. 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.