Oil prices have dropped as much as $25 per barrel since the summer, which has played merry hell with energy sector master limited partnerships (MLPs) – a favorite of income investors.
Even MLPs that hedged the price of their output months (or even years) ahead have seen the value of their reserves decline.
There is one group of income-oriented companies benefiting from the oil price decline, however, and I’ve identified the three most attractive investment opportunities within this select group…
When oil prices fall, income investors should turn their attention to MLPs that own refinery assets.
That’s because, first and foremost, a decline in the price of gasoline and other oil products increases consumption. Cheaper oil brings product prices down, and oil-based products become more competitive.
Secondly, refineries often benefit when crude prices are weak, because their output prices can remain “sticky” as their input prices decline. For example, Exxon Mobil’s (XOM) refining profit rose to $1.02 billion in the third quarter of 2014 from $592 million a year earlier, as margins widened on its relatively standardized product range.
Oil prices have fallen considerably further since October 1, so margins for refinery companies should remain bloated at least through the current quarter.
Three Attractive Opportunities
Since refineries themselves have a finite life, require refurbishment, and deliver a fluctuating cash flow, investing in them can be fairly risky, especially over a very long period such as retirement. On the other hand, their yields can be truly attractive – and can become even more so in times like the present, when oil prices are weak.
There are relatively few refinery MLPs to choose from, but of the options, the following would appear to be the most intriguing…
1. Calumet Specialty Products Partners LP (CLMT)
Calumet is a broad-based refinery MLP. Rather than simply formulating gasoline, it specializes in the kind of offbeat petroleum-related products whose sales volume can increase rapidly when prices fall.
Its quarterly dividend was $0.63 in 2008, but it fell to $0.45 during the 2009 recession. Today, the dividend has recovered to a current level of $0.685, giving it a yield of 9.8% at current prices. The catch is that third-quarter earnings were only $0.08 per share after $0.25 of derivatives losses – better than last year’s loss, but nowhere near enough to cover the current dividend. That makes CLMT a fairly high-risk proposition. But if you think we’re in for a period of robust economic growth combined with lower energy prices – the opposite of what we saw from 2010 to 2013 – then CLMT is worth a modest investment.
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2. Northern Tier Energy LP (NTI)
NTI offers a truly spectacular current yield of 16.4%, based on the last four quarters of dividends, and appears able to justify that from current operations. However, it only went public in 2012. And since then, quarterly dividends have fluctuated from $0.31 to $1.48 – the classic profile of a refinery MLP. NTI made $1.04 per unit in the third quarter and distributed $1, compared with $0.30 in the same period of 2013. Still, that yield is very attractive, and unlike CLMT, NTI doesn’t seem to pay out more than it earns.
3. CVR Refining, LP (CVRR)
CVRR is a large refiner in Coffeyville, Kansas, whose shares currently yield 9.4%, based on the last four quarters of dividends. Like NTI, its dividends fluctuate a lot. In fact, since it went public in early 2013, dividends have varied between $0.30 and $1.58. It’s worth noting that in the third quarter, CVRR earned just $21 million, only about a quarter of Q3 2013’s earnings. However, this was partly the result of a July refinery fire, and today, the facility is back up to full production.
All three of these companies have recently gone ex-dividend for third-quarter earnings, so the next round of “dividend investor roulette” – based on fourth-quarter earnings – will probably play out around February.
Still, for those who like excitement with their yield and believe that softer oil prices are here to stay, these companies are well worth considering.