Income investors seek dividends that offer safety and growth. Genesis Energy, L.P. (GEL) offers such attributes and is a compelling stock to buy. This article will focus upon the company's growing income stream and the rationale to establish a position.
Genesis Energy is based out of Houston, Texas. The company is a midstream master limited partnership which runs a diverse set of businesses that serve various industries. The company has a $2.1 billion market capitalization.
As a midstream partnership, the company offers pipeline, refinery and supply & logistical services to the midstream area segment of North America. Key customers are based in the Oil and Gas, Mining, Pulp and Paper, Refinery and Manufacturing sectors.
Investors owning natural gas exposure, as the below chart indicates, have learned the concept of a financially embarrassing commodity risk. I'll address Genesis Energy's commodity risk which will directly impact future share holder dividends.
The pipeline segment provides, for third party customers, pipeline transportation of crude oil and carbon dioxide. There isn't any risk exposure to this business segment.
The refinery service segment has two key commodity risks. They include a long exposure to sodium hydrosulfide (NaHS) and a short exposure to sodium hydroxide (NaOH). Risk is mitigated by indexing 60% of NaHS sales contracts to NaOH prices. The other 40% have short term risk controls in place to monitor for NaOH price increases.
Supply and Logistics
This business segment has risk exposure to crude oil, refined products, and carbon dioxide. The risk is closely monitored by monthly purchase and sales contracts, tight internal controls to evaluate risk measures, and low inventory levels.
Genesis Energy completed its previously announced acquisition of interests in several pipelines from Marathon Oil (MRO) for a price of approximately $200 million. Genesis Energy will receive stakes in three separate oil pipeline networks: 29% in Odyssey Pipeline LLC (a 120 mile pipeline network), 28% in Poseidon Oil Pipeline LLC (a 367 mile pipeline network), and 23% in Eugene Island Pipeline System (a 183 mile pipeline network). These all will help complement the current infrastructure, presence and capabilities in the Gulf of Mexico region.
Supply & Logistics Expansion
In November 2011, Genesis Energy expanded their Supply & Logistics capabilities in a diverse array of businesses. A key outcome is entrance to the Eagle Ford, Powder River Basin and Niobrara Shale production areas.
Genesis Energy continues to increase their quarterly dividends. On January 11th, the company announced their 26th consecutive quarterly dividend increase. 21 of the 26 increases have exceeded 10% in year over year comparisons. Income investors recognize these dividend increases as pay raises. The company is focused upon growing share holder income streams.
Genesis Energy announced that for the quarter ending 12/31/2011, the fourth quarter dividend would be increased by .0125 cents per share. This impact increases the quarterly dividend to $.44 per common unit. This particular distribution is a 10.2% increase over the 12/31/2010 dividend.
Here is a 10 year table estimating the growth of Genesis Energy's dividend and share price:
I always want to identify how a company competes against its peer group. I have, admittedly, chosen the top companies as the peer group. One key aspect is all companies, in the below table, do not have General Partner Incentive Distribution Rights. This directly and effectively provides the company a reduced cost of capital access. Secondly, share holders are paid a higher dividend as the General Partner does not skim money off the net income available for distribution.
Linn Energy, LLC (LINE)
Linn Energy is an exploration and production limited liability corporation. Linn Energy does not have any General Partner Incentive Distribution Rights. The company has natural gas production hedged, at above $5 (mmbtu) through 2015. The oil is, at a minimum hedged, at oil prices exceeding $98 a barrel.
MarkWest Energy Partners, LP (MWE)
MarkWest Energy is a midstream oil and gas provider. The midstream operations focus upon gathering, transportation and processing of natural gas; the transportation, fractionation, marketing and storage of natural gas liquids; and the gathering and transportation of crude oil.
The key operations are in the southwest, Gulf Coast, and northeast regions of the U.S. The company is the largest natural gas processor and fractionator in the Appalachian hydrocarbon region. MarkWest Energy has provided an impressive 40.8% total annualized rate of return over the past three years.
Enterprise Products Partners (EPD)
Enterprise Products Enterprise is the largest publicly traded energy partnership. The company is a midstream energy services provider offering services. Services include offering 3rd party customers access to pipelines, salt mine storage, natural gas processing, marine services, fractionation, platforms, and natural gas liquid import and export terminals.
Genesis Energy represents a portfolio of fixed margin businesses that present value to the energy chain segment. The company removed the Incentive Distribution Rights in December 2010. The management team has stressed a business model focused upon operational efficiencies, acquisition integration, and reasonable growth.
As a forward looking company, they will continue to: take advantage of opportunities that will help increase the footprint of their business, strategize by building on synergies, constantly examine ways to grow the company by way of internal or third party opportunities, and keep an eye on maintaining and growing their client base.
I believe an attractive entry price is $27.07. The equity, in recent weeks, has moved up in price. I would attempt to acquire shares at the $27.07. This would provide a 6.5% yield on cost assuming a $1.76 annual dividend.