Finding Value And Safety In Two 6% Yield Plays

Includes: KNOP, TGP
by: Bret Jensen


One of the surprises in the year so far has been the decline in interest rates and treasury yields.

Part of this is due to "flight to safety" effect, as turmoil is increasing across the globe recently, including the downing of passenger plane in Ukraine yesterday.

This has help buoy the performance of high yielding sectors such as real estate investment trusts and energy partnerships.

Profiled below are two six percent yielding energy partnerships that look attractive here that I have picked up recently.

The market suffered its first one percent decline on the S&P 500 in months yesterday, as the double whammy of a downed passenger jetliner in Eastern Ukraine and Israel sending troops into Gaza rocked the market. The geopolitical volatility in the world is increasing markedly, as America withdraws from a leadership position in many parts of the globe.

Ironically, this volatility has also been a factor driving lower treasury yields lower, as investors engage in "flight to safety" behavior when turmoil increases in the world. This has been one of the surprises in 2014, as yields on ten-year treasuries have fallen from just over 3% to begin the year to under 2.5% currently.

This downward tilt in rates has confounded the consensus from pundits who predicted the opposite to start the year. Expectations for 2014 being the year that we finally break out from the 2% annual GDP growth in this weakest post war recovery on record have been proven false so far in the year as well, also keeping yields low.

Looking on the bright side, this downward trend in interest rates has been a tailwind for high yield sectors in the market. Today, we will look at a couple of six percent yield plays in the energy sector. I have picked up both recently after the companies raised money via small secondary offerings. This has been a successful strategy that I have used over the years to enhance yield and detailed it recently right here on Seeking Alpha.

KNOT Offshore Partners (NYSE:KNOP) is a U.K.-based company that owns and operates shuttle tankers that service major oil and gas companies engaged in offshore production primarily in the North Sea. This company just came public in April, but its parent company (Knutsen NYK) has been around for over 100 years.

Earlier this month, I picked up the shares when the stock fell some 7% on a secondary that brought the shares down to under $28 a share. The stock has recovered somewhat but still is less than its pre-secondary levels.

I like this energy partnership as a solid and consistent long term yield play. It should continue to get drop down opportunities from its parent and revenues are on track to increase 40% this year and with the consensus expecting another 30% plus gain next year.

Earnings are tracking to better than a 50% gain year-over-year this year. Earnings estimates have also gone up nicely over the past month for FY2014 and FY2015 as well. The shares pay a solid yield of 6% and I would expect dividend growth to be solid over the next few years as well given its growth prospects.

I also took an initial position in Teekay LNG Partners LP. (NYSE:TGP) this morning after the stock fell more than 5% on a minor secondary. This secondary was for approximately 4% of the current outstanding float and the proceeds will be used primarily to pay down a revolving credit line. I picked up the shares at the bargain price of $44.50, below the offering price of $45.05 a share.

This limited partnership has a $6B enterprise value and consists of 29 LNG carriers, 20 LPG carriers, including four chartered-in LPG carriers, 8 Suezmax-class crude oil tankers and one Handymax product tanker. This partnership is well positioned to prosper on the long term demand for liquefied natural gas (LNG) in China in conjunction with its partner China LNG Shipping.

This entity has been around since 2005 and with the drop in the stock price, the shares yield approximately 6.3%. The company has raised its payouts some 65% since coming public. The partnership is experiencing slow growth now, but that could accelerate as global demand for natural gas liquids (NGLS) and LNG could be the next big boom in the energy sector, thanks to the breakthrough technology of fracking and other drilling technologies. Over time, I think this entity gets back to its pre-secondary price and I happy to collect an over 6% yield in the meantime.

Disclosure: The author is long KNOP, TGP. The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.

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