Building A Diversified High-Yield Energy Portfolio

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Includes: CAFD, GLBL, RIGP, SXCP, XOM
by: Short/Long Trader
Summary

With the energy sector continuing to see steep declines, there are several attractive companies in the energy sector that investors should consider.

In this article, I highlight the pros and cons of five high-yield energy sector companies.

The five companies I recommend are Exxon Mobil (XOM), 8point3 Energy Partners (CAFD), Transocean Partners (RIGP), SunCoke Energy Partners (SXCP), and Terraform Global (GLBL).

Although the energy sector will continue to experience high-volatility in the coming weeks and months ahead, these companies offer good dividends and the potential for capital appreciation.

Investing in a diverse group of high-yield energy sector companies can help provide long-term investors with both income and balanced risk.

Introduction

Energy sector investors continue to experience pain. With a broad sell-off across the energy sector and the broader market, many investors are concerned about further losses. With global equities now in a bear market, investors are fleeing to perceived safe havens like gold.

But every sell-off presents an opportunity. There are numerous opportunities available today given the massive sell-off in both the energy sector and the broader market since the beginning of this year. Buying and holding when everyone else is selling can lead to very lucrative returns in the long run. The number one lesson I learned from the 2007-2008 financial crisis is that long-term investors can find value in a sea full of red. But it is all about picking the right stocks at the right time and then ignoring the noise.

In this article, I highlight the pros and cons of five high-yield energy sector companies along with why I think investors should consider long positions in them. The five high-yield energy sector companies that I recommend from lowest to highest risk are Exxon Mobil (NYSE:XOM), 8point3 Energy Partners (NASDAQ:CAFD), Transocean Partners (NYSE:RIGP), SunCoke Energy Partners (NYSE:SXCP), and Terraform Global (NASDAQ:GLBL).

I've chosen these five companies because they provide a wide-range of options for energy sector investors, appear to be undervalued, and provide both high-yields and the potential for capital appreciation. Although the energy sector will continue to experience high-volatility in the coming weeks and months ahead, all of these companies deserve a closer look for yield-focused energy investors.

Exxon Mobil

Exxon Mobil is the preeminent global energy company. In addition to the exploration and production of crude oil and natural gas, it manufactures petroleum products and provides for the transportation and sale of all of these products. Its conservative management, excellent assets, and strong upstream and downstream segments have insulated it from the broader sell-off in the oil sector.

What I like about XOM is that it is a Dividend Aristocrat that has performed well while other oil companies have flailed. It has found a way to consistently boost its dividend over the past 33-years regardless of high or low oil prices and broader market volatility. Although it posted a Q4 profit that is 58% lower than last year, it plans to reduce capex by 25% in 2016. While it will continue to face headwinds with low oil prices, its solid leadership will continue to manage tough times and it will remain the strongest company in the sector. With a current market cap of $337 billion, Enterprise Value/EBITDA of 9.2, and a 3.6% yield, it provides a safe play and steady income for energy investors.

8point3 Energy Partners

8point3 Energy Partners is the yieldco established by SunPower (NASDAQ: SPWR) and First Solar (NASDAQ: FSLR) in 2015. Its current portfolio contains 432 MW of solar energy projects and has the right of first offer on 1.1 GW of pipeline projects. In addition, ~90% of its PPA agreements are non-residential.

What I like about CAFD is that it has two strong parent solar companies, a pipeline of projects that are primarily non-residential, and it has a solid balance sheet. With the residential solar sector in flux and a loss of confidence in it as can be seen with the meltdown of SolarCity (NASDAQ:SCTY), it is reassuring that CAFD's PPA agreements are primarily non-residential. In addition, according to its S-1, CAFD will provide a minimum quarterly distribution of $0.2097 and expects to increase its dividend payout to $1.30/annually within 3-years. Although numerous solar yieldcos have faced a variety of challenges, CAFD is in better shape than other solar yieldcos because it already has solid contracts locked in for between 16-25 years and will get additional projects from both SPWR and FSLR. With a current yield of 6.2%, it is the safest play in the solar yieldco sector right now.

Transocean Partners

Transocean Partners is the MLP of Transocean Ltd. (NYSE:RIG). It operates and acquires technologically advanced offshore drilling rigs and provides drilling services. Its drilling rigs operate under long-term contracts with both BP (NYSE:BP) and Chevron (NYSE:CVX).

What I like about RIGP is that it has long-term contracts with solid oil majors, is debt free, and has ample cash flow to cover its distributions. It has fairly new rigs, an untapped $300 million line of credit available until August 2019, and a solid parent company that wants to continue to keep up RIGP's distributions. Although offshore drilling faces profitability challenges given the current price of oil, RIGP's contracts insulate it from this issue and from the broader uncertainty in the oil market. It has a current market cap of $550 million, incredibly low Enterprise Value/EBITDA of 1.52, and an 18.2% yield. It is the most attractive long-term investment opportunity in the offshore oil drilling sector.

SunCoke Energy Partners

SunCoke Energy Partners is the MLP of SunCoke Energy, Inc. (NYSE: SXC). It is a supplier of coke used in steel production and globally it has 6.3 million tons of annual cokemaking capacity. Its 4.2 million tons of U.S. capacity represents about 25% of the U.S. and Canadian markets. Its products are provided to major steel customers like ArcelorMittal (NYSE:MT), AK Steel (NYSE:AKS), and U.S. Steel (NYSE:X).

What I like about SXCP is that it has long-term, take-or-pay contracts that insulate it from broader price volatility. In fact, none of these contracts expire before 2020. In addition, its full-year 2015 adjusted EBITDA increased $61.0 million to $191.9 million and it plans to continue to pay out a quarterly dividend of $0.594. Although it faces counterparty risk if any of the steel companies it has contracts with go bankrupt, the market has already priced this risk into its current share price. With steel markets in flux, this could be an issue of longer-term concern that investors should continue to monitor. However, with a share price of only $5.97 and an annual yield of nearly 40%, it provides the most attractive risk/reward in the coal sector today.

Terraform Global

Terraform Global is a yieldco established by SunEdison (NYSE:SUNE) last year. It is a global diversified renewable energy company that has a portfolio of wind, solar, and hydro-electric power plants. It has long-term contracts in a variety of markets, such as in India, China, South Africa, Malaysia, Thailand, Uruguay, Peru and Brazil. Its diversified portfolio and range of customers make it a dynamic global energy company.

What I like about GLBL is that it operates in a variety of emerging markets, intends to generate $231 million in cash available for distribution in its first year which should amply cover its annualized distribution of $1.10 per share, and has an average weighted PPA of 19-years with its current customers. But GLBL has been brought down because of the collapse of investor confidence in SunEdison its deeply troubled parent company. SunEdison's share price is down 96% in the past six-months over liquidity and debt concerns. Some argue that because SunEdison may potentially go bankrupt that this will necessarily drag down its yieldcos. However, GLBL has its own independent portfolio and diversified assets that should amply cover its distributions and allow it to survive come what may with SunEdison. However, given the uncertainty surrounding SUNE's impact on GLBL, this is the riskiest of my five recommendations. But at its current share price of $3.03 and yield of 36.3%, it provides the possibility of handsome returns for high risk-tolerant investors.

Track This Portfolio

One thing about the recommendations above is that I am already invested in XOM, SXCP, and GLBL and have plans to invest in CAFD and RIGP in the near future. I have skin in the game and believe that these investments will pay off in the long-run. Although these recommendations work for me, I recognize that different individuals have different investment philosophies that may make some - or all - of my recommendations moot. Hence, as with all investing, one should complete their own due diligence before taking any action.

But it is also important to evaluate one's performance when thinking about long-term investing. In order to track the progress of my recommendations, I've gone ahead and constructed a hypothetical $20,000 portfolio that includes all of these companies as a 20% share of the portfolio. In this portfolio, I've provided the current share price, current annualized yield with the assumption that this will not change (even though it almost certainly will increase for both XOM and CAFD), shares, and cost. Here is the what this portfolio would look like:

High-Yield Energy Portfolio

2-14-16

Company

Share Price

% Yield

Div Rate

Shares

Cost of Shares

Comm.

Total Cost Basis

Anticipated 1-Year Dividend Distribution

XOM

$81.03

3.6

$2.92

49

$3,970.47

$10

$3,980.47

$143.08

CAFD

$14.03

6.2

$0.87

285

$3,998.55

$10

$4,008.55

$247.95

RIGP

$7.97

18.2

$1.45

500

$3,985.00

$10

$3,995.00

$725

SXCP

$5.97

39.9

$2.38

670

$3,999.90

$10

$4,009.90

$1,594.60

GLBL

$3.03

36.3

$1.10

1,320

$3,999.60

$10

$4,009.60

$1,452.00

Total Cost: $20,003.52

Anticipated Total 1-Year Distribution: $4,162.63

Total 1-year Yield: 20.8%

Based on these assumptions, this will provide a one-year yield of 20.8%, or a total of $4,162.63 in dividends. On top of this, all of these companies will likely see some degree of share price appreciation. Although changes will undoubtedly occur, I will provide a follow-up to this piece in the future to discuss updates and check up on its performance.

Conclusion

Although the energy market will remain tumultuous throughout this year, I've tried to highlight the pros and cons of a diversified set of five high-yield energy sector companies. I've chosen these companies because I believe they provide a wide-range of options for energy sector investors, appear to be undervalued, provide high-yields, and have the potential for capital appreciation.

Long term investors should be carefully monitoring the market to find value in a sea full of red. While there are no sure guarantees on Wall Street, I have a varying degree of confidence in each of these companies and I think that all can provide handsome returns in the long run. These companies should be considered long-term 'buy-and-hold' investments. All of these companies deserve a closer look for yield-focused energy investors.

Disclosure: I am/we are long XOM, SXCP, GLBL. 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.