Protected Principal Retirement Strategy: Updating Our Energy Positions

by: Akaralph

As I have noted in each of my SA articles, the Protected Principal Retirement Strategy that I have devised is based upon withdrawing only dividend income from both taxable, and non-taxable accounts, leaving the principal as untouched as possible. My strategy seeks investment vehicles that offer on average a yield of seven percent at minimum. Needless to say, this approach requires slightly more risk than does a four percent withdrawal based upon a million dollar nest egg.

I have recently completed an analysis of the energy component of the Protected Principal Retirement Strategy portfolio since it's inception. The results are quite interesting - our master limited partnerships (MLPs) have performed extremely well; however, our royalty trust performance, with one exception leaves much to be desired.

The following summarizes the portfolio's performance.

Master Limited Partnerships

Alon USA Partners (NYSE:ALDW) - Our most recent purchase has outperformed almost the entire MLP sector, and certainly all of the market averages. It recently declared its initial distribution of $.57, which was for a partial quarter. Would it have been for an entire quarter, the distribution would have been on the order of $1.92.

Breitburn Energy Partners (BBEP) - We have owned Breitburn as part of the portfolio for a few years. While the overall price appreciation has been nominal, we have benefited from distributions that have increased from $.39 to the present level of $.47 per unit.

Calumet Specialty Products Partners (NASDAQ:CLMT) - They should all be this good! Calumet has been a stellar performer, and continues to expand its business, along with distributable cash flow. Distribution increases on the order of $.03 per quarter have been the norm for the past five quarters.

Crestwood Midstream Partners (NYSE:CMLP) - Shortly after initiating a position in CMLP it declined just over ten percent. In recent months, this decline reversed and we now have a nice profit. While the distribution has increased only nominally, The yield on our purchase price is in the mid-eight percent range.

Global Partners LP (NYSE:GLP) - Our initial investment in Global was made in the Summer of 2012, and its performance since has paralleled that of . The string of nominal distribution increases was recently broken this past quarter when increased it by 6.9 percent.

Compressco Partners (GSJK) - Our investment in this specialty partnership has performed very well. Of late, the stock has declined somewhat, on no news. The distribution declared in January of this year constituted the largest percentage increase (5.5 percent), since Compressco began trading publicly.

Memorial Production Partners (NASDAQ:MEMP) - Another more recent purchase, Memorial has only began to move up in recent days. We are now showing a small profit; however, Memorial has recently received a few upgrades and we expect it to move into the low 20's near term. The quarterly distribution continues to increase and we are content to rest on a double digit yield while we await further price appreciation.

Transmontaigne Partners (NYSE:TLP) - We were fortunate to have picked up a small position in Transmontaigne during the "flash crash" a few years back. As a result, we have benefited from a double in the stock price. Distribution increases have been consistent, if only nominal.

Vanguard Natural Resources LLC (NYSE:VNR) - One of our upstream holdings, Vanguard has been a profitable member of our portfolio, although recently its price has stagnated somewhat. It has changed its distribution payments from quarterly to monthly, and the rate has shown a slight increase.

Crosstex Energy (XTEX) - We recently have taken a small position in Crosstex. The good news is that since purchasing it has moved up fairly sharply. The bad news is that apparently we did not buy enough. The rationale was that we were looking for a slight pullback after buying and did not (as yet) get one. The quarterly distribution has remained constant at $.33 for the past four quarters.

I have purposely omitted Enterprise Products Partners (NYSE:EPD) from this analysis as we originally held Teppco Partners when Enterprise acquired them several years ago. As close as I can determine our adjusted price on Enterprise is slightly over $20.

The Table which follows provides a summary of our profit/loss on each of the portfolio's partnership positions.

MLP Buy Price Current Price Profit/(Loss)
ALDW $21.17 $28.46 +34.4%
BBEP $18.27 $19.71 +7.9%
CLMT $20.40 $36.93 +81.0%
CMLP $23.33 $25.84 +10.8%
GLP $21.26 $34.62 +62.8%
GSJK $13.98 $18.50 +32.3%
MEMP $18.32 $18.57 +1.4%
TLP $20.87 $42.86 +105.4%
VNR $22.63 $27.95 +23.5%
XTEX $14.90 $18.09 +21.4%

The "total return" on these investments is not available at this time since up until about 15 months ago we opted for reinvestment of distributions.

Royalty Trusts

Our royalty trust portfolio positions consist of a mix between finite United States trusts and perpetual Canadian trusts.

Chesapeake Granite Wash Trust (NYSE:CHKR) - While we continue to have an optimistic outlook for Chesapeake, our results have been less than spectacular - in fact they have not been good at all thus far. We have a loss on our original purchase price; however, has generally met, or exceeded the subordination threshold for each quarter's distribution. In fact, for two of the six quarters they exceeded the target distribution rate.

Sandridge Permian Trust (NYSE:PER) - We are in a similar position with Sandridge, where we have a loss in the trust's price since purchasing. The distribution results have been better than those of . Sandridge has easily exceeded the subordination threshold distribution for each quarter since inception, and with the exception of the most recent quarter have also exceeded target distribution levels. One of the "clouds" hanging over this trust is the underlying situation with Sandridge Energy (NYSE:SD), and its recent sale of royalty properties proximate to those owned by . Hopefully, this will be resolved soon.

Eagle Energy Trust (ENYTF.PK) - This is our most recent portfolio acquisition. We were fortunate to get in at a low price (after a large holder sold a considerable number of shares) which resulted in the underlying price dropping from just above $10 to the low $7's. Concerns about dividend sustainability seemingly were quieted by press releases by the trust, and we continue to hold our position which sports a yield just north of 12 percent.

Freehold Royalties Ltd. (OTCPK:FRHLF) - If all of our trust positions treated us as well as Freehold has, we would sleep much better. Our position in Freehold was initiated a few years back, at much lower levels, and the monthly distribution of $.14 has been consistent, although not increasing. It currently provides a yield of close to 11 percent.

Our royalty trust performance is summarized in the Table which follows.

Trust Buy Price Current Price Profit/(Loss)
CHKR $23.42 $17.60 (-24.8)%
PER $20.92 $16.60 (-20.7)%
ENYTF $8.58 $7.95 (-7.3)%
FRHLF $15.85 $23.10 +45.7%

Other Energy Holdings

Our two other energy holdings are Norwegian companies - Seadrill (NYSE:SDRL) and North Atlantic Drilling (NATDF.PK).

Seadrill - We have held Seadrill in the portfolio for the past few years, and despite its relative volatility, we have substantial profits and receive a healthy quarterly distribution. Seadrill continues to increase the distribution, and about once a year comes up with a special dividend.

North Atlantic Drilling - North Atlantic is primarily owned by , and specializes in harsh weather environments. Like , we have held it for a few years. It has recently had a reverse 1:5 split (necessary in order to list on the NYSE). It continues to pay a distribution of $.225 quarterly.

Our performance in this sector is presented in the Table which follows.

Stock Buy Price Current Price Profit/(Loss)
SDRL $29.66 $37.70 +27.1%
NATDF $8.75 (Adjusted) $10.34 +18.2%


While obviously not pleased with the overall performance of our royalty trusts, on balance the energy sector of the Protected Principal Retirement Strategy portfolio has pretty much outperformed the markets, from the standpoint of stock price and total return.

Disclosure: I am long ALDW, BBEP, CHKR, CLMT, CMLP, ENYTF.PK, OTCPK:FRHLF, GLP, GSJK, MEMP, NATDF.PK, PER, SDRL, TLP, VNR, XTEX. 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. The information presented does not constitute a recommendation to buy or sell any of the stocks mentioned.