Years ago I used to invest in many MLP's (Master Limited Partnerships) and had a good amount of success with them. Commodity prices were higher across the board, it was a no miss type of scenario. Then over time these commodities became fractured, and by that I mean they didn't all trade in one direction, you had to pick and choose which ones. Gold and silver went one way, and oil and natural gas went another way. One has piqued my interest and it isn't because of the ridiculously high dividend. I believe it is oversold in sympathy because of the commodity rout. Take a look and let me know what you think.
SunCoke Energy Partners, L.P. (SXCP $7.30) a master limited partnership, produces and sells coke used in the blast furnace production of steel in the United States. It operates through two segments, Domestic Coke and Coal Logistics. The company also provides metallurgical and thermal coal mixing and handling terminal services, as well as operates Convent Marine Terminal, an export terminal in the United States Gulf Coast, located in Convent, Louisiana. It offers coal handling and/or mixing services to steel, coke, electric utility, and coal mining customers. SXCP is a wholly owned subsidiary of SunCoke Energy Inc, who has more than 50 years of cokemaking experience serving the steel industry. The beauty of this company is that they don't mine at all and the stock has been down because the price of coal has gotten obliterated over the last 12 months, here's a link to the Dow Jones US Coal Index to illustrate.
It is clear to see the comparison of the stock drop as well, as it has fallen 68% in the past 52 weeks.
I am having a difficult time explaining the dividend, which is why I am not touting it as a selling point. Currently it is paying around 32%. Their January dividend was $.594 or $2.38 a year, that was a 10% increase. SunCoke said they would analyze their position on a quarterly basis. Anyone who does not expect a dividend cut in the near future is most likely fooling themselves. However, with cash flows increasing as business turns up, I ask myself why isn't the dividend sustainable. Theoretically they should be paying down debt as that leads to a more stable balance sheet. SunCoke currently has roughly $895 million in debt and around $50 million in cash. Speaking of balance sheets the company reported earnings in January.
The quarterly report was impressive, they managed to make money in a very challenging time for the steel and coal industry. The chart shows a growing uptrend from the established base in coal. I think the stock is cheap here at $7.30. However long the company decides to hold the dividend up is an ancillary benefit. Don't get me wrong if the stock stays flat here and the dividend does not get cut for a year, then count your blessings. Of the 6 analysts that cover the stock 4 of them are at a "hold" or "buy", with a mean target price of $9.50 and a median target price of $10.30. The 2016 industry projected growth rate is -14%, but SunCokes is 7.3%.
Lets analyze the future of coal, as it is vital to the ability of SunCoke to increase their free cash flow.
Coal as Input for Steel Industry: Due to its heat-producing feature, hard coal (metallurgical or coking coal) forms a key ingredient in the production of steel. Nearly 70% of global steel production depends on coal. Since met coal is an essential ingredient for the production of steel, U.S. metallurgical coal producers could benefit from the increase in steel consumption.
Demand Upsurge in Asian Countries: The increase in coal demand in Asian economies like China and India has been a key price driver since the end of the recession in 2009. We expect this trend to continue in the future mainly due to rising energy needs in India, China and South Korea. The current decline in demand in China will hurt, but the markets are going to improve gradually, if we go by the report from the International Energy Agency. The two Asian countries also produce coal, but not enough to meet the growing demand in the region, resulting in a continuous need to import. These two countries also rely heavily on coal for electricity generation. Japan is also importing large volumes of coal following the deactivation of its nuclear power plants. Given the rising demand from the fast-growing Asian economies, U.S. miners will find it attractive to export coal to these regions.
I will wait to offer any guidance on the options as I want to watch them trade. It seems the $7.5 strike prices pay well for May, August and November, but I am not sure I want to write here. I think the stock could move back to $9 over the short term and then perhaps we can look at the $10 strike as a possible exit strategy on half or all of the position. As always, good luck and let me know your thoughts.
Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within 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.