With oil recovering from the price crash many investors are eager to learn about which dividend stocks might do well should high petroleum prices return.
While predicting short-term oil prices is pretty much impossible, lets look at why Linn Energy (NASDAQ: LINE), its holding company, LinnCo (NASDAQ: LNCO), and solar and wind yieldco TerraForm Power (NASDAQ: TERP) are three great long-term, high-yield investments set to profit should high oil prices eventually return.
Linn Energy: two competitive advantages
There are two main reasons why I think Linn Energy -- in both its master limited partnership and C-corp variations -- is likely to prosper from potential future high oil prices and deserves to be on your income investing radar.
The first reason is that Linn owns a great portfolio of assets after heavy wheeling and dealing last year that replaced a lot of high-production cost, high-decline rate acreage with low-drilling cost, low-decline oil and gas fields.
Source: Linn Energy investor presentation.
Since traditional shale oil wells deplete very quickly, Linn's 2014 deals -- several of which occurred before the oil crash -- show not only good foresight by management, but also give it a significant competitive advantage over its rivals. That's because it allows the MLP to greatly reduce capital expenditures -- as much as 65% in 2015 -- while potentially maintaining existing production.
Source: Linn Energy investor presentation.
Should oil prices recover, Linn's cash flow will greatly increase, and with its low overall portfolio decline rate it should be able to generate significant excess distributable cash flow to not only secure its existing payout, but grow it in the future.
That's particularly true because In addition to its strong portfolio of low cost, low decline drilling projects, Linn Energy is partnering with GSO Capital Partners and Quantum Energy Partners to create two joint ventures designed to allow Linn Energy to grow its distribution in the future. These joint ventures increase Linn's future production with no risk to its own capital and enable it to profit from competitors' distress by acquiring further low-decline assets at greatly depressed prices.
Alternative energy yieldcos: high-yield from the future of energy
Although renewable power sources such as solar and wind don't really compete with oil because their primary markets--electricity for renewables, transportation for oil-- don't overlap that much, a lot can be said about investor sentiment between oil and renewables. High oil prices tend to create incentives that fuel the growth of green power because it makes the economics of alternative energy more appealing, particularly since the cost of renewable power such as solar continues to decline. Thus, should high oil prices eventually return, renewable energy yieldcos -- which own alternative energy power plants that generate long-term contracted cash flow used to pay investors -- are a potentially great indirect way to profit from high oil prices.
One of my favorite yieldcos is TerraForm Power, whose sponsor, SunEdison (NYSE: SUNE) is a one of the world's leading solar power project builders, with over 5 gigawatts of solar power under management and 7.5 GW of solar and wind projects in its total project pipeline.
TerraForm currently operates 1.675 GW of solar and wind power plants in four countries. More importantly, it has the right of first offer to buy up to 3.6 GW of upcoming projects from SunEdison over the next few years, which could increase its overall energy portfolio size by 212%.
With an average weighted 16 years remaining on its power purchase agreements -- 94% of which are with utilities with investment grade credit ratings -- the generous yield is not only sustainable in the long term but also likely to grow strongly in the future.
In fact, thanks to the enormous potential supply of future wind and solar projects SunEdison plans to drop down to TerraForm, management is guiding for the dividend to nearly double by the end of 2019 -- representing 18.4% compound annual growth over the next four years.
Takeaway: high-yield oil stocks aren't the only way to profit from high oil prices
While a return to the previous high oil prices in the short term can't be accurately predicted with any certainty, high-quality oil MLPs such as Linn Energy and LinnCo are two great ways for income investors to profit from likely long-term future high oil prices. Meanwhile income investors seeking a longer-term time frame -- one that extends into a potential "post oil" era -- can also profit from potential rising oil prices through high-yield alternative energy yieldcos such as TerraForm Power as higher crude prices will only accelerate the adoption of alternative energy sources.
