Oil prices have declined some 20% from the beginning of May to a little more than $84 per barrel of light sweet crude oil. Natural gas prices, which have been in a free-fall for years now, have also declined as much from the beginning of the year, albeit rising some 4.4% from May 1, 2012 to $2.39 per MMBtu.
Some market observers have interpreted these price declines as immediate drags on both the top and bottom lines of oil and natural gas producers. As a result, many master limited partnerships (MLPs) and companies engaged in the business have seen sharp declines in their unit and stock prices. Linn Energy's (LINE) unit prices are down 9.5% since the beginning of May. Over the same period, unit prices of Vanguard Natural Resources (VNR) are lower by 13.3%, while unit prices of EV Energy Partners (EVEP) have plunged 20%.
While oil and natural gas prices fluctuate, the noted business entities apply commodity hedging in order to capture cash-flow margins and reduce cash-flow volatility. These hedges secure long-term cash flow predictability, which, in turn, allows MLPs and companies engaged in this business to manage ongoing operations and to pay regular cash distributions. Therefore, regardless of near-term price declines in the value of oil and natural gas, heavily hedged MLPs and companies have secure cash flows that guarantee sustained cash distributions.
Here are three stocks of businesses that apply heavy hedging of their future oil and natural gas production volumes. All these entities carry yields in excess of 6%, representing excellent investment choices for income investors seeking high yield opportunities in the current yield-starved environment.
Vanguard Natural Resources LLC, a $1.3 billion independent oil and natural gas producer, hedges some 80% of its projected oil output through 2014 at a floor price of $90.80 per Bbl and about 75% of its projected natural gas production through 2014 at $5.36 per MMBtu. These prices are well above the current oil and natural gas prices. Vanguard Natural Resources pays a high dividend yield of 10.1% on a payout ratio of 98%. This company currently does not get much attention from famous fund managers.
Also engaged in prudent commodity price management is Linn Energy LLC, a $7.3 billion independent oil and natural gas company. The company has hedged 100% of its projected oil output through 2015. For example, the company's production this year is hedged at a weighted average oil price of $98.08 per Bbl, while in 2015, the average price will be $97.13 per Bbl.
Also, Linn Energy has fully hedged its future natural gas production through 2017. The weighted average natural gas price for its hedged production this year is $5.43 per MMBtu. For comparison, the price declines to $4.37 per MMBtu in 2017. These prices are well above the current market levels of oil and natural gas prices. Linn Energy pays a high dividend yield of 8.2%. Its payout ratio is 60%. It should be noted that fund manager Leon Cooperman, who controls a 2.4% stake in the company, is bullish about Linn Energy.
Also applying significant hedges to its expected oil and natural gas output is EV Energy Partners, an MLP with a market cap of $2.2 billion. This company has hedged 90% of its oil and natural gas output this year and 80% next year. The company's oil production this year is hedged at an average price of $95.49 per Bbl, according to its swap contracts. In 2013, its expected output is hedged at an average price of $89.08 per Bbl. At the same time, the company's natural gas production projected for the rest of 2012 is hedged at an average price of $4.85 per MMBtu, while its 2013 total natural gas output is hedged at a price of $4.97 per MMBtu. These prices are well above the current market prices for the two commodities.
EV Energy Partners pays a dividend (distribution) yield of 6.3% on a payout ratio of 71% of earnings. Although currently unpopular with hedge fund managers, this MLP has seen some relevant insider buying lately. On June 1, the company's Executive Chairman of the Board, John B. Walker, acquired 10,000 shares (with indirect beneficial ownership) for a total cost of $499,700.
This is the third time in the past three months that Walker has purchased shares in his MLP. On the previous two occasions, he acquired 12,000 shares (in indirect ownership) for the total cost of $718,619. Over the past two months, another insider, the company's President and CEO, Mark Houser, acquired (also in indirect beneficial ownership) on two occasions a total of 3,500 shares for the cost of $207,740.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.