Energy stocks run the gamut from giant international oil companies to the utilities that provide electricity and natural gas. Our Motley Fool investors have scanned the landscape to find some unique income opportunities that might be potential buying opportunities right now. If you're searching for energy stocks, you need to take a look at Cheniere Energy Partners LP (CQP 0.54%), Buckeye Partners, L.P. (BPL), and NextEra Energy Partners LP (NEP -1.49%). Here's why these limited partnerships deserve your attention.
Too much cash to be ignored
Tyler Crowe (Cheniere Energy Partners): Not too long ago, Cheniere Energy Partners was burning through cash at an incredible rate as the company transitioned its Sabine Pass liquefied natural gas (LNG) terminal from an import to an export facility. That isn't the case anymore, though, as three-fourths of the facility -- or one-half if you count future expansion plans -- is fully operational.
Image source: Getty Images.
Thanks to the long-term, fixed-fee supply contracts it has signed and the high spot prices for LNG shipments not under contract, Cheniere's facility has been firing on all cylinders and producing impressive results. In fact, the partnership was able to meet some of the financial milestones necessary to raise its distribution ahead of schedule. As a result, Cheniere Energy Partners is now paying a distribution to unitholders that currently yields 6.8%, and that number could grow even more in the coming quarters.
With the fourth liquefaction process train slated to start in the first half of this year, management is now guiding for distribution of $2.00-$2.20 per share. Similarly, train five will be complete in the second half of 2019, which should provide another significant boost to distributable cash flow and its payout. What's even more encouraging is that more than 85% of that revenue is locked in under those fixed-fee contracts, which require customers to take their shipments, so there is little fear of waning interest in Cheniere's LNG supplies.
Cheniere Energy Partners' shares haven't moved much in the past five years because of concerns related to the high costs associated with the switch from importing to exporting and the debt load it took on to make it happen, but now with Sabine Pass a fully functioning facility and generating gobs of operating cash, investors looking for a sizable income check with lots of upside should check out Cheniere Energy Partners.
An 11% yield and a plan
Reuben Gregg Brewer (Buckeye Partners, L.P.): Buckeye Partners is a midstream oil and gas limited partnership with a unique global footprint in the storage niche. It greatly increased its reach overseas with the early 2017 purchase of 50% of VTTI. At $1.15 billion, it was a large transaction for the $7.7 billion partnership.
A significant portion of the funding for VTTI was provided by the sale of new Buckeye units. The partnership's unit count was up about 8.4% year over year in the third quarter of 2017. That helped push distribution coverage below 1. This is a key reason for the current weakness in Buckeye's units, despite the fact that the company's revenue is backed by a largely fee-based business.
| Name | Market Cap | Distribution Yield |
|---|---|---|
| Cheniere Energy Partners | $14 billion | 6.8% |
| Buckeye Partners | $6.5 billion | 11.2% |
| NextEra Energy Partners | $2.1 billion | 4.1% |
To be fair, Buckeye is embarking on a big investment cycle. In addition to the VTTI deal it's also planning to build new pipelines and expand existing assets. All of this will cost money up front before revenue comes in. And while VTTI is contributing today, the real benefit will come as that joint venture expands its own capacity.
That said, Buckeye has been through this before, most recently in 2013 and 2014 when coverage dipped below 1 on growth spending. It rose over 1 in 2015 and 2016 as investments bore fruit, with adjusted EBITDA growing each year. The partnership has a 22-year history of annual distribution increases and letting distribution coverage dip as it invests for the future. With that as a backdrop, the 11% yield looks like it could be an opportunity to buy a growing midstream partnership that thinks long term while investors are thinking short term.
A top renewable energy dividend
Travis Hoium (NextEra Energy Partners): The one energy sector that we know is growing in 2018 is renewable energy. Wind and solar energy have become cost-effective against fossil fuels and developers have exploited that fact around the world.
One segment of the renewable energy market that isn't as certain is finance. Projects are being bid so aggressively that companies need a low cost of capital just to survive. Yieldcos like NextEra Energy Partners with plans to grow long term and acquire projects need the market's confidence on both a debt and equity side just to stay in the game. But with the backing of NextEra Energy, NextEra Energy Partners has a low cost of capital and a growth pipeline for the foreseeable future.
On the cost of capital side, NextEra Energy Partners raised $550 million of unsecured notes due in 2024 at a 4.25% interest rate and $550 million of unsecured notes due in 2027 at 4.5%. That's among the lowest in the industry and lower than TerraForm Power's recent debt raise of $500 million of 2023 notes at 4.25% and 2028 notes at 5% interest rate.
Beyond the debt side, NextEra Energy Partners has one of the lowest distribution yields in the yieldco industry at 4.1%. That may sound like a bad thing, but it allows the company to sell units to buy projects that are accretive, or grow, the distribution over the long term. NextEra Energy Partners says this low cost of capital and its pipeline of projects from NextEra Energy give it visibility to grow the distribution 12% to 15% for the next five years. That's a great quality for any energy name, and given the growth in renewable energy, I think this is a partnership to own for the long run.
A host of options
That's three solid options in the broader energy space that could help satisfy your income needs. Cheniere's growth efforts are starting to bear fruit, resulting in distribution hikes. Buckeye's currently weak distribution coverage is related to its growth plans and reminiscent of past growth periods, suggesting its high yield will hold. And NextEra Energy Partners has a pipeline of projects and low capital costs that should lead to robust distribution growth. At least one of these names is likely to interest income investors looking for a new energy stock to own.
