An Energy Play for Dividend Investors: NGP Capital Resources

Mar. 8.11 | About: OHA Investment (OHAI)

NGP Capital Resources Company (NGPC) is a Business Development Company (BDC) specializing in the energy sector. It provides financing to a variety of small energy companies -- primarily oil and gas producers, but also coal mining companies and energy infrastructure companies. Its assets consist primarily of debt instruments, of which a large proportion are secured. However, it also has royalty interests and equity interests which constitute roughly 15% of the fair value of its investment portfolio. Its cash holdings exceed its debt by roughly $46 million, so that it is not one of those BDCs that could be described as being under the shadow of "lender problems" or ratio issues.

NGPC closed Monday at $9.85 per share, which represents a significant discount from its $11.01 a share book value. I backed out the cash and calculated that an investor is paying roughly $7.70 for $8.86 in assets (the book value of the company minus its cash), or a discount of roughly 13 percent. Investors should bear in mind that the last financials covered the period ending September 30, 2010. It would not be unreasonable to anticipate the possibility of some increase in the book value of NGPC's oil and gas royalty interests in the last five months.

NGPC also has a very large position in Alden, which is a metallurgical coal company. Again, met coal has been in demand, and this position could turn out to be worth more than the September 30 book value.

Thus, NGPC provides an investor with some upside in the event oil prices take off. The met coal position also appears to be attractive, given increasing global demand. Unlike many other strategies for playing the energy market, NGPC provides investors with a generous dividend -- currently at the level of 7.4% (because NGPC is an RIC, the dividend is primarily taxed as ordinary income, so this holding is most appropriate for IRAs and other tax-sheltered accounts). Thus, NGPC provides a dividend-oriented investor with some protection against an explosion in energy prices. It is attractively priced at a significant discount below the September 30 book value.

Investors should be aware that NGPC is not without risks. In the past, it has had investments that sustained significant losses. It has a relatively large portion of its portfolio tied up in one investment -- Alden -- and that always creates some risk.

NGPC is relatively small and, until it grows its portfolio, there will be a tendency for expenses to constitute a high percentage of gross revenue. NGPC, like many other BDCs, got really pounded during the downturn, had to restate its financials, and experienced a collapse in its stock price. There have been times in the recent past when the discount to book value was much larger; it is not impossible that that situation will recur.

Still, I think that the current discount to book value reflects an "echo" of past problems that NGPC has put behind it. Investors should consider NGPC as part of a dividend-oriented portfolio and should watch its price movement to identify attractive entry points.

Disclosure: I am long NGPC.