The S&P 500 Energy Index was recently more than 11% higher than where it began the year. The midstream-focused Alerian MLP Index is on a similar trajectory, up 12.3% year to date. Even the Philadelphia Oil Service Sector Index was up 7.4%, despite the fact producers are getting more done with fewer rigs and related services. I like CrossAmerica Partners LP (CAPL) here if you can buy on a dip, counsels Elliott Gue, editor of Energy and Income Advisor.
Fourth-quarter and full-year financial filings are always far more complex than quarterly results the rest of the year. Smaller companies especially need more time to complete them. So, it’s no surprise the data we receive as investors is always stretched out, with CAPL and ONEOK Inc. (OKE) the last two Model Portfolio and High Yield Energy List members to report this time.
The good news is, both had the solid numbers and guidance needed to remain recommended companies. For investors in High Yield Energy list member CrossAmerica, the high dividend is the primary driver of returns.
CrossAmerica Partners LP (CAPL)
With no increases since a May 2018 cut, assessing payout safety is always our primary concern. Fortunately, there were no real causes for concern, as distributable cash flow covered the payout by 1.8 times in Q4 and 1.46 times for the trailing 12 months. That compares with 1.67 and 1.77 times, respectively, for the year-ago period.
Leverage was higher at 4.2 times (3.7 times in 2022) but well within management’s target range. And there’s a strong likelihood of further moderation this year as growth CAPEX boosts cash flow.
Traffic typically drives revenue from CrossAmerica’s network of service stations and convenience stores. It, in turn, is heavily impacted by demand for fuel. Volumes were generally weaker this year. But the company was largely able to offset the impact with effective cost management, boosting margins and offsetting softer wholesale and retail volumes. The company also benefitted from acquisitions that added 41 new stores.
A Federal Reserve pivot to lower interest rates should help demand for gasoline as well as reduce the cost of CrossAmerica’s debt, which has been moderated with extensive use of interest rate swaps. But until there is a return to at least modest dividend growth, we expect the stock to continue trading in a relatively narrow trading range.
Recommended Action: Buy CAPL on a dip.
