This Undervalued Energy Stock Is Worth Buying For Its 9.8% Yield

Aug.13.12 | About: Eagle Rock (EROC)

Eagle Rock Energy Partners, L.P. (NASDAQ:EROC) is a name more investors should consider for high income potential and even capital gains. With many well-known dividend stocks already picked-over by millions of investors, the obvious choices for generating income are now yielding less than meaningful amounts. For example, less than a year ago, it was possible to buy Merck & Co Inc. (NYSE:MRK) for about $30 per share, and back then it offered a yield of well over 5%. But today, the stock trades at over $44 per share, and the yield has been driven down to about 3.8%. That is still solid, but not exactly exciting stuff. Energy stocks are also yielding less than before, even though oil is well below the $100 per barrel mark it set earlier this year. Exxon Mobil Corporation (NYSE:XOM) shares were around $68 per share in the past 12 months and the stock paid a dividend yield of well over 3% per year, but the stock has been pushed up by income-hungry investors and Exxon's yield is now just 2.6%.

Eagle Rock Energy Partners, L.P., is a higher risk, but much higher reward stock when compared to the likes of Exxon or Merck. Putting a few shares of this and other off-the-beaten-path investments could really reward investors. We take a closer look at the company, along with some reasons why it might make sense to buy a few shares at the current levels.

Eagle Rock Energy Partners, gathers, processes, and transports, natural gas and natural gas liquids. It also develops oil and natural gas projects. It has operations and projects in Texas, Louisiana, the Gulf of Mexico, Oklahoma, Alabama, and Mississippi. This company is set up as a limited partnership which enables it to pay a high-level distribution to shareholders that is based on cashflow from operations. Here are a couple of positive points to consider that could mean the shares are going higher:

1. Eagle Rock is planning for growth and it recently announced a deal to buy two natural gas processing plants and around 2,500 miles of pipelines in Texas from a BP PLC (NYSE:BP) division called "BP America Production Co." The deal is valued at about $227.5 million in cash, and could close in October. This acquisition will allow Eagle Rock to process more natural gas and realize some cost benefits. It also expects this deal to fuel growth and allow it to increase the payout to shareholders in 2014.

2. Based on book value and the yield, this stock appears undervalued and it has room to move higher. Other companies in this sector offer lower yields when compared to Eagle Rock and the shares trade for just over book value, which is $7.64 per share. By contrast, Energy Transfer Partners (NYSE:ETP), offers a yield of about 8%, and it trades at $44.60 , well over the $28.55 per share in book value. While Energy Transfer Partners may deserve a premium valuation, the gap might narrow and push Eagle Rock shares higher over time.

Key Data Points For Eagle Rock From Yahoo Finance:

  • Current Share Price: $8.96
  • 52-Week Range: $8.25 to $11.81
  • Dividend: 88 cents per share - which yields 9.8%
  • 2012 Earnings Estimate: 21 cents per share
  • 2013 Earnings Estimate: 32 cents per share

Data is sourced from Yahoo Finance.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

Disclaimer: No guarantees or representations are made. Please consult a financial advisor before making investments.