High-Yielding Monthly Dividends From Quality Oil and Gas Producers

Many investors like receiving dividends on a monthly basis. This article highlights two high quality, high-yielding oil/gas producers with strong growth catalysts likely to drive future dividend/distribution increases.

May 26, 2014 at 9:55AM

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
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Adam Galas has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

4 in 5 Americans Are Ignoring Buffett's Warning

Don't be one of them.

Jun 12, 2015 at 5:01PM

Admitting fear is difficult.

So you can imagine how shocked I was to find out Warren Buffett recently told a select number of investors about the cutting-edge technology that's keeping him awake at night.

This past May, The Motley Fool sent 8 of its best stock analysts to Omaha, Nebraska to attend the Berkshire Hathaway annual shareholder meeting. CEO Warren Buffett and Vice Chairman Charlie Munger fielded questions for nearly 6 hours.
The catch was: Attendees weren't allowed to record any of it. No audio. No video. 

Our team of analysts wrote down every single word Buffett and Munger uttered. Over 16,000 words. But only two words stood out to me as I read the detailed transcript of the event: "Real threat."

That's how Buffett responded when asked about this emerging market that is already expected to be worth more than $2 trillion in the U.S. alone. Google has already put some of its best engineers behind the technology powering this trend. 

The amazing thing is, while Buffett may be nervous, the rest of us can invest in this new industry BEFORE the old money realizes what hit them.

KPMG advises we're "on the cusp of revolutionary change" coming much "sooner than you think."

Even one legendary MIT professor had to recant his position that the technology was "beyond the capability of computer science." (He recently confessed to The Wall Street Journal that he's now a believer and amazed "how quickly this technology caught on.")

Yet according to one J.D. Power and Associates survey, only 1 in 5 Americans are even interested in this technology, much less ready to invest in it. Needless to say, you haven't missed your window of opportunity. 

Think about how many amazing technologies you've watched soar to new heights while you kick yourself thinking, "I knew about that technology before everyone was talking about it, but I just sat on my hands." 

Don't let that happen again. This time, it should be your family telling you, "I can't believe you knew about and invested in that technology so early on."

That's why I hope you take just a few minutes to access the exclusive research our team of analysts has put together on this industry and the one stock positioned to capitalize on this major shift.

Click here to learn about this incredible technology before Buffett stops being scared and starts buying!

David Hanson owns shares of Berkshire Hathaway and American Express. The Motley Fool recommends and owns shares of Berkshire Hathaway, Google, and Coca-Cola.We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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