3 U.S. Energy Investments for Retirement Income

In a previous article, I suggested three U.S. energy companies for growth in a retirement account. For current or near retirees, income is another factor that weighs heavily on the mind. The current boom in U.S. energy production offers income opportunities for those wishing for a regular payment beyond what they may receive from pensions or Social Security. Here are three energy companies producing substantial income for their investors.

Hoping for big returns from Berry acquisition
Perhaps better known of late for controversies surrounding its hedging practices and accounting than its income potential, Linn Energy (NASDAQ: LINE  ) and its financial holding entity, Linn Co (NASDAQ: LNCO  ) , took a tumble this past year. Trading at around $37 a share for the first part of the year, Linn dropped to less than $25 over the summer before inching its way back to $30 a share. The SEC launched an informal inquiry into alleged improprieties regarding Linn's acquisition of Berry Petroleum and hedging practices and found nothing wrong.

Further, banks have helped underwrite the Berry deal and other recent acquisitions. As Fool contributor Matt DiLallo pointed out, banks seem unfazed by Linn's hedging practices or cash flow. Perhaps the banks see the producing assets and improved oil recovery from Linn's waterflooding expertise. Given how stringent banks have become since the Great Recession, this loan activity shows confidence in Linn.

The big question for investors remains: How much will the Berry acquisition add to cash flow and distributions? According to company projections, Berry will increase Linn's production by an estimated 30%. This, in turn, should boost the coverage ratio from today's 0.9 to about 1.2. Hopefully, in time, distributions will also increase. The current yield is about 10% with distributions paid monthly.

Diversified portfolio leads to growing distributions
Similar to Linn, BreitBurn Energy Partners (NASDAQ: BBEP  ) is a master limited partnership that exists solely to generate cash flow to distribute to its investors. BreitBurn operates a variety of oil and natural gas plays in Texas, Florida, California, the Midwest, and Wyoming. These assets have proven production histories and predictable decline rates. Acquisitions add to the distributable cash flow.

While a smaller company compared to Linn on the basis of market capitalization, BreitBurn offers income-oriented investors a superior track record of growing distributions. Since 2010, BreitBurn's quarterly distribution has increased each quarter. BreitBurn will begin monthly distribution payments this month. The current yield is about 9.8%. The latest distribution coverage ratio is 1.3.

According to its latest presentation, BreitBurn continues to acquire assets, grow production, and grow distibutions. Last year's acquisitions exceeded those of 2012 with a clear emphasis on oil production. Additionally, BreitBurn's current portfolio of assets also grows organically from successful drilling operations. These activities bode well for future distribution growth.

A midstream company with a twist
Genesis Energy
(NYSE: GEL  ) is a master limited partnership that operates oil pipelines, storage facilities, railroad cars, ships, and trucks for the energy industry, primarily around the Gulf Coast. Genesis offers advantages over the likes of Linn and BreitBurn.

First, its pipelines business carries no direct exposure to oil prices. Second, the company enjoys a measure of diversity; for example, shipping CO2 to producers for enhanced oil recovery as well as shipping crude oil to a refinery. Third, no matter who the oil producer is or where production takes place, Genesis makes a buck off it.

Perhaps another asset to Genesis is its sulfur removal services offered to refineries. The company removes sulfur from oil as payment in kind, uses the sulfur to make sodium hydrosulfide, and then sells the stuff to the paper pulp or copper mining industries. Genesis derives roughly 22% of its revenue from this sulfur-related activity.

Financially, Genesis pays roughly a 4% yield with a distribution that has steadily grown since 2005. Its coverage ratio is 1.1. The future looks promising. For example, in the second quarter of 2014, Genesis should start shipping oil by rail from its Pronghorn facility in Wyoming. This will be the only rail facility in the Powder River Basin shale play to serve two major rail lines and will allow oil to be shipped to refineries on both the U.S. East Coast and West Coast as well as the Gulf Coast.

Final Foolish thoughts
Master limited partnerships can offer great income, but look for the coverage ratio: that is, the ratio between earnings and distribution. Generally, you want a ratio of at least 1. Below that indicates the company is paying out more than it earns -- an unsustainable situation. Sometimes the coverage ratio will drop for a quarter due to extenuating circumstances. Be leery of companies consistently reporting ratios below 1.

Each of these companies offers its own blend of income and risk. Genesis offers the lowest risk (and income) since most of its business isn't tied directly to the price of oil. So long as oil is produced and shipped, Genesis makes money. Right now, BreitBurn looks like the best combination of yield, growing distributions, and coverage ratio. While there is greater risk, the yield and track record are hard to ignore. 

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  • Report this Comment On January 06, 2014, at 11:39 AM, brooks1988 wrote:

    BBEP's most recent DCF coverage was 1.3 as you note; however, that was before recent share issuance that dropped the number significantly. Look for a substantially lower coverage ratio with the 4Qtr numbers.

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