Why Income Investors Should Consider This High-Yield Stock
If you have been following the markets at all, you would know that the energy sector isn’t in the best of shape. With oil prices plunging more than 40% from where they were in the summer of 2014, many energy companies are still deep in the doldrums.
However, with the downturn in these companies’ share prices, yields have started to become attractive. NGL Energy Partners LP (NYSE:NGL), for instance, now pays 13.11%.
Of course, double-digit yielders don’t really have the best outlook. But NGL Energy Partners is an exception. While the partnership offers a yield that’s higher than 99% of stocks trading on the U.S. stock exchanges, its business has actually been improving. Let me explain.
Headquartered in Tulsa, Oklahoma, NGL Energy Partners is a master limited partnership (MLP). While most MLPs own and operate oil and gas pipelines, NGL Energy Partners runs a vertically integrated energy business with five operating segments: “Crude Oil Logistics,” “Water Solutions,” “Liquids,” “Retail Propane,” and “Refined Products and Renewables.”
As you would expect, NGL Energy Partners’ stock tumbled with the downturn in oil and gas prices, just like its peers. Since the summer of 2014, NGL shares have plunged more than 70%. Ouch!
Most recently, however, things have started to look better. In the last three months, NGL stock surged over 30%.
The reason behind the stock’s rally is the partnership’s growing financials. In the three months ended September 30, 2017, NGL Energy Partners generated adjusted earnings before interest, tax, depreciation and amortization (EBITDA) of $90.8 million, representing a 20% increase year-over-year. (Source: “NGL Energy Partners LP Announces Second Quarter Fiscal 2018 Financial Results,” NGL Energy Partners LP, November 6, 2017.)
Growth was across the board. For the quarter, each of the partnership’s five operating segments reported more than 10% volume increase compared to the same period last year. In particular, NGL Energy Partners’ water disposal volume increased 30% year-over-year in the September quarter.
The partnership also improved its profitability. For the quarter, Crude Oil Logistics, Water Solutions, Liquids, and Refined Products and Renewables all generated higher adjusted EBITDA margins. While profitability declined for its Retail Propane business, note that the segment is much smaller compared to the other four, and the impact was limited on partnership-level financials.
What’s more, since the downturn in oil and gas prices started, the partnership has transformed its business model into a more vertically integrated business mix that provides a natural hedge against the volatility in commodity prices. For instance, NGL Energy Partners’ Crude Logistics segment, which accounts for around 20%–25% of annual EBITDA, would benefit from higher prices. The Refined Products and Renewables segment, which represents about 15%–25% of annual EBITIDA, on the other hand, would generate more profits under lower commodity prices. (Source: “Investor Presentation,” NGL Energy Partners LP, last accessed November 17, 2017.)
With a unique business mix that can serve as a natural hedge, NGL Energy Partners can mitigate the impact of commodity price swings. And that should be reassuring for income investors interested in the energy sector.
Last, but certainly not least, NGL Energy Partners has a generous distribution policy. With a quarterly payout of $0.39 per unit, NGL stock offers an annual yield of 13.11% at the current price.
If the partnership can continue to improve its business, investors might be able to earn some capital gains on top of those oversized dividend payments.