Thanks to strong demand for dividends, the average stock in the S&P 500 Index now yields just over 2%. It's even tough to generate above-average income by going with oil stocks like Exxon Mobil Corporation (XOM), which now yields just 2.6%, and Chevron Corporation (CVX) which offers a yield of 3.2%. Even ConocoPhillips (COP) shares, which have historically been one of the highest-yielding energy stocks, now yield 4.6%. These large-cap oil stocks are trading near 52-week highs and therefore might only offer limited upside, along with yields that are less than competitive when compared to some lesser-known oil and gas stocks.
One of the highest-yielding, but not as well known stocks in this sector is Linn Energy, LLC (LINE), which develops and produces oil and gas projects located in the Mid-Continent Range, the Permian Basin, and the Williston Basin. Linn Energy shares yield about 7.4%, which is nearly triple the payout at Exxon and is just about double the yield of Chevron shares.
That said, there is one company that operates in some of the same regions as Linn Energy - it yields about 11.5% and insiders are buying:
LRR Energy (LRE) went public in 2011, and is set up as a limited partnership. It focuses on oil and gas production, as well as acquisitions. The company targets low risk projects with long-lived production profiles. This enables the company to generate steady cash flow, and it uses that to pay a generous quarterly cash distribution to unit holders.
With many dividend stocks trading at or near 52-week highs, it is increasingly difficult to find high-yield stocks that appear undervalued. However, insiders at LRR Energy appear to see value in this stock and they have been buying. On August 15, 2012, Eric Mullins (an officer), bought 7,200 shares in a transaction worth about $121,000. He also bought 18,200 shares in May 2012, in a transaction worth about $305,000. Three other insiders also bought shares in May 2012, in transactions worth over $100,000. Here are a few reasons to consider buying this high-yield stock:
1) LRR Energy operates over 12 fields in three regions. As of March 31, 2011, it had over 30 million barrels of oil equivalent of estimated net proved reserves. The Permian Basin Region comprises about 55% of total reserves, the Mid-Continent Region is 33%, and the Gulf Coast Region is about 12% of reserves. This gives LRR Energy some regional diversification and that lowers risks for shareholders.
2) LRR has an active hedging program which removes some risks from the volatility of oil and natural gas prices. It also maintains operation control on most of its projects, and carries a relatively low debt level, all of which reduces risks for investors.
3) LRR Energy recently reported solid financial results. For the quarter ending on June 30, 2012, it announced average production of 6,462 barrels of oil per day, total revenues of $40.4 million, and net income of $13.4 million, or 54 cents per partner unit. It also announced the closing of a $65.1 million acquisition for projects in the Permian Basin and the Gulf Coast. Organic production growth and acquisitions like this can lead to additional distribution growth in the future.
With insiders buying and a yield that appears safe, this stock looks undervalued and it could continue to trend higher.
Here are some key points for LRE:
- Current share price: $17.55
- The 52 week range is $12.25 to $22.39
- Earnings estimates for fiscal year 2012: $1.43 per share
- Earnings estimates for fiscal year 2013: $1.16 per share
- Annual dividend: $1.90 per share, which yields about 11.5%
Data is sourced from Yahoo Finance.
Disclaimer: No guarantees or representations are made. Hawkinvest is not a registered investment advisor and does not provide specific investment advice. The information is for informational purposes only. You should always consult a financial advisor.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.