The energy industry is one of those few sectors where investors can find high-yielding dividend stocks. Like the wildcatters that hope to find the next big reservoir, though, investing in this industry can be hit or miss. The cyclical nature of the business has led to many fortunes made and fortunes lost -- or in the case of dividend investors, rapid payout growth followed by steep cuts. Those dividend stocks you can count on through thick and thing just aren't as common here.
If you're looking for reliable dividend stocks in the energy industry, two companies you might want to check out are Enterprise Products Partners (NYSE:EPD) and Helmerich & Payne (NYSE:HP). If you're willing to take on a little more risk for a higher yield, then you might consider Golar LNG Partners (NASDAQ:GMLP), as well. Here's a quick rundown of why you may want to take a look at these three stocks.
Slow and steady
Enterprise Products Partners is the model of what a master limited partnership should be. It pays a decently high yield -- about 6% -- and has increased that payout every year since its IPO back in 1998. It has avoided the pitfalls that have resulted in so many other midstream MLPs either keeping payouts flat, or cutting distributions: The solution was to build an integrated infrastructure network, grow at a reasonable pace, and don't be wholly reliant on external cash sources for new capital.
What makes Enterprise's assets so valuable is the options it provides customers. The company owns the nation's largest natural gas liquids (NGL) pipeline network that connects to every ethylene processing facility in the U.S. and 90% of the oil refineries east of the Rocky Mountains. These assets are even more valuable today, thanks to the advent of shale drilling. With so much excess NGLs produced, there's now an immense opportunity to manufacture petrochemicals with this cheap feedstock, as well as to export excess supply globally.
In less than three years, Enterprise has gone from almost no NGL export capability to the world's largest exporter of liquid petroleum gas (LPG). It plans on doing the same with ethane when its Morgan Point export facility is up and running in 2017. These opportunities presented themselves because it was able to leverage the strength of its existing NGL pipeline and processing network to deliver NGLs from across the U.S. to terminals on the Gulf Coast at relatively low cost.
When you combine this asset profile with Enterprise Product Partners' shrewd capital allocation approach, you'll get a company that handles the ups and downs of the market well. Even in 2016, as oil and gas prices were weak and production was on the decline, Enterprise was able to maintain its 5% annual distribution growth trajectory, while retaining $700 million in excess cash to fund capital projects.
These traits are what you want in a midstream master limited partnership, and today's dividend yield makes Enterprise an attractive investment.
Reliability with room to grow
If you want a reliable, growing dividend, then Dividend Aristocrats are probably a place you want to look. Even though Helmerich & Payne is in an industry that isn't conducive to steady payout growth, it has been able to increase its dividend for 44 years in a row. Prudent financial management, efficient management of its fleet of rigs, and superior capital allocation have enabled the company to weather the ups and downs of the cyclical oil services market.
What's most encouraging about Helmerich & Payne as a dividend stock today comes down to how it has managed the downturn. In 2016, arguably the worst year for North American oil rigs in decades, the company was able to meet all its spending and dividend obligations with cash from operations. That was even when its fleet utilization rate for the fiscal year 2016 was only 30%. Since the end of the fiscal year in September, rig utilization has already improved to 48%. All of these new rigs heading out into the field will eventually lead to more cash coming in the door, giving the company an opportunity to either increase its payout, or buy back stock.
Predicting where oil and gas prices will go from here is close to impossible, but Helmerich & Payne's management has shown it's adept at managing the cyclical nature of the market, while still rewarding shareholders. That should be very encouraging for shareholders today.
Higher yield, higher risk
Anytime a company has a distribution yield of 10% or more, investors have every right to be weary. That applies, in particular, to master limited partnerships because many rely on issuing equity to pay for new organic growth. At first glance, Golar LNG Partners' current yield of 10.4% seems like it is destined for a cut. If you look at the business as it stands today, though, there are some signs that the company will be able to maintain this current payout for a while.
Golar LNG Partners is the subsidiary partnership of Golar LNG (NASDAQ:GLNG). The two develop, own, and charter floating LNG liquefaction vessels, LNG shipping vessels, and floating LNG regasification vessels.
Floating LNG liquefaction and regasification units are a unique offering that can monetize what's called stranded natural gas. These are sizable reservoirs, but not quite large enough to justify building an LNG facility on land, or in places where natural gas infrastructure isn't that robust. Golar LNG Partners owns and operates these vessels under long-term charters that generate stable cash flows.
One encouraging element is that demand for these assets seems to be in place. One of the company's transport vessels was set to go off charter in the second quarter in 2017, but management has already found a new client that has signed on to a nine-year charter, once it becomes available.
From a financial standpoint, it's also encouraging that Golar LNG Partners kept distribution growth at a modest pace. Last quarter, management announced a distribution coverage of 1.57 times. A high coverage ratio means the company is retaining a decent chunk of cash each quarter to help fund growth, rather than wholly relying on outside sources of capital.
Let's be clear -- any yield that high is a risk. A few vessels not being able to find charters, or an overambitious growth plan funded by debt, could put the company in a tight spot. If the company maintains its current trajectory of slower growth and retains a lot of cash to pay for assets, then Golar LNG Partners is one of the better positioned partnerships sporting a monstrous yield.