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High-Yielding Monthly Dividends From Quality Oil and Gas Producers

Income investments are often used by retirees to provide income to pay living expenses. Most bills are paid on a monthly basis, yet most dividend stocks pay quarterly. Wouldn't it be wonderful to find high-quality, high-yielding income stocks that paid out monthly, to better match monthly expenses, or to compound dividend reinvestment faster? Luckily for income investors there are many such companies, and this article points out two -- both oil and gas producers. Each company has a long history of delivering high and consistently growing income to patient long-term investors, and each has strong growth catalysts for continued dividend/distribution growth going forward. 

Baytex Energy  (NYSE: BTE  ) is a Canadian exploration and production company that operates in Western Canada, including the famous Alberta tar sands, which hold the third largest oil reserves in the world.

The scope and magnitude of the tar sands is truly impressive. At 169 billion barrels of proven oil reserves (recoverable with today's technology), western Canada is behind only Saudi Arabia (265 billion barrels) and Venezuela (211 billion barrels) in total oil reserves (13% of global reserves). Long-term investors should keep two facts in mind: 

  • Only 15% of this 169 billion barrels of oil is currently being developed.
  • The projected total amount of oil contained within the tar sands is 1.8 trillion barrels, nearly four times as much as Saudi Arabia and Venezuela combined. 
  • Future technology may greatly increase recoverable reserves, making Canada the world's leading supplier of oil.
Into the massive profit opportunity presented by the tar sands megatrend steps Baytex Energy, a small but fast-growing company. In the forth quarter of 2014 the company had 318 million barrels of oil equivalent in reserves, 59,500 barrels per day of production, and $197 million in operating income ($788 million annualized). 
In other words, Baytex is a very small fish swimming in the mother of all oil oceans. The potential growth runway for this company is not only long in theory, but the company has a solid track record of growing both reserves and production. Since 2006 Baytex has grown its production at a 7% CAGR while reserves have growth by 12%.
This impressive growth has been from its assets in Canada, but now, Baytex is expanding internationally, and this poses an exciting growth catalyst that promises to make long-term investors rich.
Specifically, I am referring to the company's recent acquisition of Aurora Oil and Gas. This 2.8 billion Canadian dollar deal is expected to close in June of 2014 and will immediately be 15% accretive to funds from operations, which pays the dividend. 
Aurora's assets include 22,200 net acres in the Eagle Ford with proven and probable reserves of 167 million barrels of oil equivalent and daily production of 28,600 barrels/day.
Management is guiding for an immediate 9% increase to the monthly dividend upon the closing of the deal. This would bring the yield to 6.1% which falls to 5.2% after the 15% Canadian withholding is taken into account. 
With strong growth catalysts in both Canada and now Texas, Baytex is likely to continue its strong history of dividend growth (8.2% average growth rate since 2006) and long-term market outperformance (19.6% annual returns vs 6.9% for market).  

Vanguard Natural Resources  (NASDAQ: VNR  ) is, simply put, one of the premier names in upstream MLPs. Its eight-year history has been one of masterful accretive acquisitions, totaling $3.4 billion, and strong and consistent distribution growth. Since its IPO  it has grown its monthly distribution by 5.8% CAGR and even raised the distribution by 7% in 2009 at the height of the financial crisis -- it now yields 8.3%. 
The major growth story with Vanguard is its latest acquisition, a $581 million purchase of Wyoming natural gas fields that increased the company's total reserves by 80% and production by 55%. Historically, the way Vanguard operated was to buy already producing assets cheap, then use aggressive hedging to lock in long-term cash flows to pay the distribution. With this latest acquisition management is switching tactics, instead choosing to aggressively invest in increasing production. This more aggressive strategy resulted in management guiding for 2014 production increases of 46%-56% and a 30% increase in adjusted EBITDA. The latest earnings reports shows that management is making good its promises.
In the first quarter, production was up 35% over the first quarter of 2013, with adjusted EBITDA up 24%. The reason these results were not better, and why the distribution coverage ratio dipped to .83, was due to a few factors. First, the former owner of the fields, Anadarko Petroleum, chose to not participate in new wells being drilled by Vanguard's partners QEP and Ultra Petroleum. In addition, the timing of the acquisition close, January 31, resulted in an incomplete quarter, and bad weather resulted in delays in new well drilling and associated revenue.   
The next quarter should see the distribution coverage ratio rise above 1, not only securing the current distribution but allowing for strong growth going forward.

Foolish takeaway
Monthly income-seeking investors can find several great companies in the energy sector that help meet their goals, and Baytex Energy and Vanguard Natural Resources are two excellent options. Both companies have strong records of growth in terms of production, profits, and dividends/distributions. Both are investing heavily in North America's energy renaissance, and both are likely to continue to deliver superior, market-smashing total returns for years to come.

Use America's energy bonanza to grow your income
Record oil and natural gas production is revolutionizing the United States' energy position. Finding the right plays while historic amounts of capital expenditures are flooding the industry will pad your investment nest egg. For this reason, the Motley Fool is offering a look at three energy companies using a small IRS "loophole" to help line investor pockets. Learn this strategy, and the energy companies taking advantage, in our special report "The IRS Is Daring You To Make This Energy Investment." Don't miss out on this timely opportunity; click here to access your report -- it's absolutely free. 


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Adam Galas

Adam Galas is an energy writer for The Motley Fool and a retired Army Medical Services Officer. After serving his country in the global war on terror, he has come home to serve investors by teaching them how to invest better in order to achieve their financial dreams.

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8/28/2015 4:01 PM
BTE $5.16 Up +0.47 +10.02%
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VNR $9.62 Up +0.47 +5.11%
Vanguard Natural R… CAPS Rating: ***