Building A Diversified High-Yield Energy Portfolio - One Year Later

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

Summary

This article provides a reflection on the high-yield energy portfolio I created a year ago.

Of the five companies I recommended, four have seen some degree of share price appreciation and two have increased their dividend payouts.

There are a lot of lessons that can be learned from this portfolio building experience, chief among them being buying when others are fearful, and then holding long term.

Overall, this portfolio is up 87.8% in one year including dividends. This portfolio has significantly outperformed the S&P 500 Index, which is up 24.9% in the same period.

Successful investing is all about knowing what to buy when, and at what price. In reality, this is a lot more difficult than it sounds, and many fortunes have been lost on Wall Street.

But at the same time, many billionaires from our era have made their fortunes through equities. While Warren Buffett is an extreme example of this, many average investors have made a killing on the Street.

A year ago, I decided to create a diversified high-yield energy portfolio to take advantage of the sell-off in the energy markets. In my original piece, I argued:

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.

Last year at this time, investors were concerned that the energy market would kill the seemingly overheated bull market. Beginning in January and ending in February, the market sold off heavily over concerns with the energy sector.

But after two turbulent months of declines, oil prices began to stabilize and reverse course from the $30 bbl range. In February, at the height of pessimism, I created a diversified, high-yield energy sector portfolio to take advantage of what looked to be a contrarian buying opportunity.

The five high-yield energy sector companies that I recommended 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).

This piece will examine developments with each of these companies, and then look at the portfolio's overall performance. I will end by providing investors with some conclusions I've drawn from this experience, and briefly mention what sector I'm buying this year.

Exxon Mobil

The safest investment in the energy sector for quite a while has been Exxon Mobil. As a Dividend Aristocrat, it has performed well in both bull and bear markets for decades. But as a mega-cap company with only modest growth prospects, this is a company investors primarily look to for capital preservation and a reliable yield.

Over the course of the year, Exxon Mobil did not disappoint and paid a consistent dividend throughout (the last dividend payment will be received next month).

Cash Amount

Date Received

0.75

6/10/2016

0.75

9/9/2016

0.75

12/9/2016

0.75

3/10/2017

But it has disappointed in terms of share price appreciation. After getting a nice bump after the elections, its share price has eased back to $83/share. This is not much higher than the ~81/share it was trading at a year ago in spite of the fact that oil prices are $20 higher. The main reason for its lackluster share price performance is the fact that it has had negative revenue growth alongside an increase in leverage. With the likelihood of oil prices staying in the $50 to $60 range this year, it is unlikely investors will see significant share price appreciation. But investors will still see another dividend hike, and a likely return to revenue growth.

8point3 Energy Partners

When 8Point3 came into existence through a partnership between SunPower (NASDAQ:SPWR) and First Solar (NASDAQ:FSLR) in 2015, it arrived at a time when renewable energy companies were beginning to test the yieldco model. This yieldco model has faced difficulties across the sector, and is a primary reason why CAFD did not see share price appreciation this year.

A key element of the yieldco model is to utilize secondary share offerings to provide funds for accretive growth. This is exactly what CAFD did when it purchased a 49% stake in the Henrietta solar project by raising funds through a secondary offering. 8Point3 ended up selling 8.05 million shares last September to help fund this $134 million purchase. The value add of this project is that it will generate $11 million annually in cash available for distribution for the next 20 years.

But because of CAFD's aggressive growth strategy in 2016, it has taken on more debt than the market thinks is wise. Consequently, shares sold off after the last earnings report despite the fact that CAFD is following through on its initial plan for strong growth.

To address market concerns, CAFD has gone ahead and decided to move forward with an additional secondary offering. Selling $125 million worth of shares will reduce its overall debt profile, and the additional ~9 million Class A shares will not affect distribution. Distribution growth is projected to increase by 12% this year, which is amply covered by an anticipated ~$100 million in cash available for distribution. This comes after an excellent year of consistent 3.5% growth.

Cash Amount

Date Received

0.2246

4/14/2016

0.2325

7/15/2016

0.2406

10/14/2016

0.249

1/13/2017

Although CAFD's share price has underperformed this year, it remains my strongest conviction buy and hold from this portfolio for the long run

Transocean Partners

Transocean Partners was the MLP of Transocean Ltd. (NYSE:RIG). However, it was acquired by Transocean Ltd. in a merger on December 9, 2016, and last traded at $17.83/share. As part of the merger agreement, shareholders of RIGP received 1.2 shares of RIG.

While RIGP no longer exists as an independent company, it still paid out consistent dividends throughout its existence.

Cash Amount

Date Received

0.363

2/25/2016

0.363

5/24/2016

0.363

8/24/2016

0.363

11/22/2017

Whereas originally investors who had made a $4,000 investment last February would have had 500 shares of RIGP, now investors would have 600 shares of RIG instead.

But owning RIG today is not a deep-value proposition. With long-term uncertainty about the profitability of offshore drilling, and the fact that RIG does not offer a dividend, this is company I can no longer recommend.

SunCoke Energy Partners

SunCoke Energy Partners is the MLP of SunCoke Energy, Inc. (NYSE:SXC). It was the top performer in this portfolio, and its share price has tripled over the course of a year.

As with Transocean, SunCoke Energy is looking to acquire its MLP. SXC is offering SXCP shareholders the opportunity to receive 1.65 shares of SXC as part of its proposed merger agreement. Although this agreement may be revised a bit in favor of SXCP shareholders, it is likely this merger will happen sometime this year. Consequently, continuing to hold SXCP is only valuable if investors want to become SXC shareholders in the long run.

Irrespective of what happens with the potential merger, SXCP had a tremendous 2016, and consistently paid out dividends (the last dividend payment will be received next month).

Cash Amount

Date Received

0.594

6/1/2016

0.594

9/1/2016

0.594

12/1/2016

0.594

3/1/2017

This has been a very lucrative investment, and is an example of how a high yield can continue to be paid even during times of uncertainty.

TerraForm Global

TerraForm Global is the orphaned yieldco established originally established by SunEdison (OTCPK:SUNEQ). It has continued to operate a portfolio of wind, solar, and hydroelectric power plants around the world while looking for a new parent company.

The likely new parent company that GLBL will eventually merge with is Brookfield Asset Management (NYSE:BAM). It has a current offer to either acquire 100% of GLBL for up to $4.35/share or replace SunEdison as the company's sponsor and purchase 50.1% of outstanding shares for up to $4.25/share.

This exclusivity agreement is on the table until March 9, which means there is potential arbitrage play in progress. Given that GLBL is trading at $4.7/share right now, the market believes BAM will make a significantly higher final offer.

For investors who have been long GLBL since below $4/share, it makes sense to ride this one out. For high-risk tolerant arbitrage investors, GLBL may be worth buying. But for most investors, sitting on the sidelines while this plays out is the safest thing to do.

But for investors who did buy GLBL last February, they would been paid one dividend of $0.275 on 3/17/2016, and seen significant share price appreciation.

Portfolio

The data from the portfolio demonstrates consistent outperformance at each time interval.

The initial portfolio looked like this:

2-14-16

Company

Share Price

% Yield

Div Rate

Shares

Cost of Shares

Comm.

Total Cost Basis

Anticipated One-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 One-Year Distribution: $4,162.63

Total One-year Yield: 20.8%

At its inception, I hoped the dividends combined with share price appreciation would allow for strong outperformance. After three months, I wrote an update and presented the data below:

5-14-16

Company

Share Price

% Yield

Div Rate

Shares

Share Value

Comm.

Unrealized Gain/Loss

Anticipated One-Year Dividend Distribution

YTD

Dividends Received

XOM

$88.66

3.4

$3.00

49

$4,344.34

$10

+$243.33

$147.00

$36.75

CAFD

$14.23

6.3

$0.90

285

$4,055.55

$10

+$275.00

$256.50

$64.01

RIGP

$11.70

12.4

$1.45

500

$5,850.00

$10

+$1,465.00

$725.00

$362.50

SXCP

$11.00

21.6

$2.38

670

$7,370.00

$10

+$3,239.50

$1,594.60

$397.98

GLBL

$2.63

41.8

$1.10

1,320

$3,471.60

$10

-$577.60

$1,452.00

$363.00

Current Value (Dividends Inclusive): $25,091.49

Dividends Received: $1,224.24

Percent Change Including Dividends: +31.6%

Whereas the S&P 500 Index was at 1,864.78 on February 12, it stood at 2,046.61 on May 13. Hence, the S&P 500 was up 9.8% while this portfolio was up 31.6%.

After six months, I provided another update. The data from the update is below:

8-14-16

Company

Share Price

% Yield

Div Rate

Shares

Share Value

Comm.

Unrealized Gain/Loss

Anticipated One-Year Dividend Distribution

YTD

Dividends Received

XOM

$87.85

3.4

$3.00

49

$4,304.65

$10

+$324.18

$147.00

$73.50

CAFD

$15.66

6.0

$0.94

285

$4,463.10

$10

+$464.55

$262.80

$130.27

RIGP

$11.75

12.3

$1.45

500

$5,875.00

$10

+$1,890.00

$725.00

$543.75

SXCP

$13.80

17.2

$2.38

670

$9,246.00

$10

+$5,246.10

$1,594.60

$797.30

GLBL

$3.58

TBD

TBD

1,320

$4,725.60

$10

+726.00

TBD

$363.00

Current Value (Dividends Inclusive): $30,522.17

Dividends Received: $1,907.82

Percent Change Including Dividends: +52.8%

After six months, things looked even better. Four out of the five companies were showing significant share price appreciation, and the dividends kept rolling in. The S&P 500 Index stood at 2,184.05 on August 12, or increasing by a total of 17.1% since February 12. This portfolio was up 52.8%.

The final one-year data looks great:

Company

Share Price

% Yield

Div Rate

Shares

Share Value

Unrealized Gain/Loss

Dividends Received

Percent Change (Dividend Inclusive)

Cumulative Cash Value

XOM

$83.00

3.6

$3.00

49

$4,067

+$67

$149

+5.9%

$4,216

CAFD

$13.60

7.2

$1.00

285

$3,876

-$124

$269.81

+3.4%

$4,145.81

RIG

$13.4

n/a

n/a

600

$8,040

+$4,035

$726

+119.4%

$8,766

SXCP

$18.35

12.3

$2.38

670

$12,294.50

+$8,284.60

$1,591.92

+246.3%

$13,886.42

GLBL

$4.70

n/a

n/a

1,320

$6,204

+$2,205.40

$363.00

+63.8%

$6,567

Total Initial Cost: $20,003.52

Current Value: $34,481.50

Dividends Received: $3,099.73

Current Value (Dividends Inclusive): $37,561.23

Percent Change Including Dividends: +87.8%

With the exception of CAFD, each company has seen share price appreciation. While RIGP no longer exists, investors would now own RIG, and this is still worth twice as much as the initial investment in RIGP.

The S&P 500 Index currently sits at 2,328.25, and has gone up 24.9% in one year. While this has been an amazing year for the S&P 500, this portfolio still beat out the S&P 500's gains by about 63%.

Date

Portfolio Value

S&P 500 Index

Portfolio % Gain

S&P 500 Index % Gain

2-14-16

$20,003.52

1,864.78

-

-

5-14-16

$25,091.49

2,046.61

31.6

9.8

8-14-16

$30,522.17

2,184.05

52.8

17.1

2-14-17

$37,561.23

2,328.25

87.8

24.9

Lessons Learned

There are five key lessons I've learned from this experience:

1. Be greedy when others are fearful

Last year, I hit the nail on the head with the energy markets. It's a sector I've always followed, and I happened to buy while others were selling. Although this advice has become a cliché, it is still a useful rule of thumb for investors to remember.

2. Conviction is critical

Everyone on this site and elsewhere has an opinion about the stock market and what direction it will go. But the most important thing individual investors can have is conviction in their purchases. Before purchasing any company, one should realistically assess whether or not it is the right buy, and right fit for your particular circumstances. If you have conviction in what you buy, you stand to make a lot of money while others dither.

3. Loss aversion leads to failure

It is basic human psychology: we prefer avoiding losses to acquiring equivalent gains. We'd rather not lose $100 than gain $100. I think about my own experience with this portfolio. I have owned all five of these companies over the course of this past year, and yet I currently only own XOM and CAFD. Although I made significant gains on RIGP, SXCP, and GLBL, I also left a lot of money on the table. One interesting point to note is the seemingly riskier stocks outperformed the more conservative stocks. This reminded me of another key lesson to remember:

4. Asymmetric risk/reward requires patience

I knew that RIGP, SXCP, and GLBL were the riskier investments, but I also was convinced they were significantly mispriced. But I sold all three too early, and have lost out on potential gains. Meanwhile, my safe investments have continued to conserve capital, but have not really outperformed. With that being said, it is important to remember outperformance can sometimes take much longer than anticipated, which is why arguably the most important takeaway is:

5. When in doubt: Buy and hold

This is probably the most common advice all investors know, but often times, it is the hardest to follow. I know that I've fallen into the trap multiple times of thinking: "Well this stock has doubled, time to take profits." But had I been patient, I would have made a lot more in the long term. Feeling the need to perpetually do something can often lead investors to doing something harmful. Just as we investors take time to do whatever work we have to do, we should remember the market takes time to do its work as well.

Final Thoughts

I wrote about this portfolio in real time for anyone on Seeking Alpha to read and act upon. Think about it: With a small investment of $20K, investors would have almost doubled their money in one year. I tried to create an evenly balanced portfolio representing different parts of the energy sector, and hoped it would see significant share price appreciation and a high yield. The portfolio was based on research and conviction, and ended up being a smashing success.

Of course, it is important to note that just about any investment in the energy sector - with the notable exception of the solar industry - saw dramatic gains after last February's lows. So it is important to recognize that while this portfolio did indeed outperform, the energy sector did very well as a whole. However, this portfolio still significantly outperformed the Energy Select Sector SPDR ETF (NYSEARCA:XLE), which has gone from $55.83/share to $73.42/share during the same period, or an increase of 31.5%. Although the energy sector will likely continue to see some gains this year, I don't think it will be the strongest performing sector.

Many observers believe the financial sector will outperform this year with a business-friendly Trump administration in power. But since many companies in the financial sector have already seen massive gains, it is not the sector I find to be most attractive (though I still think it will outperform).

My favorite sector this year is healthcare. With tremendous political uncertainty surrounding Obamacare, and how the Trump administration will deal with healthcare reform, many stocks in the sector have sold off too aggressively. I have been buying various healthcare stocks in the past month and a half, and will write about some of those here on Seeking Alpha in the future.

The bottom line for me as an investor is that I look for deep-value propositions where there is asymmetric risk/reward either short or long. Of course, I do hold conservative anchor stocks to balance my overall portfolio, but I am always looking for ways to improve my investing performance. I believe that even in this eighth year of the second longest bull market in US history, there is still a lot of value to be found. It's just about digging deep, having conviction, and patiently buying to hold.

Thanks for reading, and good luck investing! Follow me (by clicking the "Follow" button at the top of this article next to S/L Trader) to receive general stock market research and commentary, especially on deep value plays that offer asymmetric risk/reward either short or long.

Disclosure: I am/we are long XOM, CAFD.

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.

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