2 More Attractive High Yield Plays In Energy

Includes: EROC, PDH
by: Bret Jensen


I am tilting my portfolio away from growth plays that have run up into more income-orientated investments.

I continue to find attractive yield opportunities in the energy sector as the domestic production boom continues.

Profiled below are two high yield plays that are in different parts of the energy sector.

Tuesday I penned a piece on some of the attractive yield plays available in the booming energy sector highlighting a couple of energy partnerships that paid a 10% distribution yield that looked attractive for income investors.

My investment outlook is that the returns in the market are likely to be just a fraction of 2013's levels. I am tilting my portfolio away from growth plays that have run up and putting more on the income side of my portfolio. Today I will profile a couple of more high yield energy partnerships I hold in my income portfolio.

Eagle Rock Energy Partners (NASDAQ:EROC) is an energy partnership currently consists of both an upstream and a midstream business. There are two reasons investors should consider Eagle Rock in their portfolio. Obviously the first is Eagle Rock's robust distribution yield of 11.7%. The company has a history of moving its payout up and down which has perplexed and frustrated investors over the past couple of years.

However, the company announced in December that it is selling the midstream part of its business to Regency Energy Partners (NYSE:RGP) for just over $1.3B. This sale has been held up by the Federal Trade Commission which has requested additional information. However this transaction should eventually get approved.

This will leave the upstream business to Eagle Rock. The breakup should greatly decrease the complexity of the business and hopefully make it easier to value and more manageable as a company.

Earlier this year completed a long-term deal to deliver and sell monthly quantities of natural gas liquids to Phillips 66 (NYSE:PSX) at its Sunray gas plant. This is important as it improves the certainty of Eagle Rock's long-term revenue streams.

Eagle Rock is priced right at $5 a share. The three analysts that cover the shares have price targets ranging from $6.50 to $7.50 a share, nice capital return potential on top of an over 10% yield. The company has stated it was challenged by severe winter conditions in the just completed quarter but this concern should lift as winter has concluded.

PetroLogistics LP (NYSE:PDH) owns and operates a propane dehydrogenation facility that processes propane into propylene in North America. The company came public in May 2012 and has a market capitalization of just under $2B. I last wrote about this entity in Mid-January when I picked up some shares which have performed well since.

This entity pays variable distribution payouts. Yields quoted in sites like Yahoo! Finance almost always get annual yield incorrect due to that. The total distribution payouts made in FY2013 totaled $1.70 a share in 2013. This gives the shares a 13.5% distribution yield at its current price levels.

PetroLogistics has more than doubled operating cash flow since the end of FY2011 and the shares go for less than 9x operating cash flow right now. PDH also goes for ~9x trailing earnings. Earnings are projected to be down this year but the shares should distribute at least 10% in payouts this year. Its first quarter payout was slightly up from the same quarter last year which is encouraging. Quarterly results should be available on April 23rd.

Disclosure: I am long EROC, PDH. 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.