S&P energy sector profits surged a whopping 124% in the second quarter, and they’re expected to soar another 94% in the third quarter, too, according to FactSet Research. That would be almost five times the S&P 500’s overall growth rate forecast, explains Mike Larson, editor of Weiss Ratings' Safe Money Report.
What’s boosting energy profits? Strong economic growth on the one hand, and concerns about Iranian supply on the other. Iran is the third-largest producer in OPEC, and it will fall under U.S. sanctions as of November 4.
All of this is great news for U.S. producers, who are churning out record amounts of oil. Despite rising production, overall U.S. oil stockpiles have been falling. That’s because of strong demand and because we’re exporting more and more of our crude to foreign buyers.
I don’t know if oil is going to hit $100 a barrel. Or if it’s going to really shift into hyperdrive like it did in 2007-2008. But I do know that it’s probably a good time to add some exposure to energy in the model portfolio.
The underlying fundamental and technical backdrop looks solid, and there are some attractive, high-yielding plays in the sector. It’s time to energize your portfolio with an oil stock that’s leveraged to the U.S. production boom — Viper Energy Partners LP (VNOM).
Viper owns oil and natural gas interests in the Permian Basin in western Texas. It leases that land to drillers who are responsible for getting resources out of the ground and to the market. The income this generates is used to fund generous dividends for its unitholders.
Right now, Permian production is booming thanks to new “fracking” technology. Just look at this chart from the Railroad Commission of Texas. It shows how we’ve gone from production of only 710,000 barrels per day of oil in 2008 to a whopping 2.09 million bpd this summer.
That growth is helping drive profits nicely higher. In the second quarter, net income came in at $99.4 million, or $1.35 per unit. That was up more than four-fold from $22.1 million, or 23 cents per unit, a year earlier.
It netted a price of $50.10 per boe/d of output. That was up from $37.64 a year earlier. Oil made up 71% of total production. The combination of higher acreage, higher output and higher prices has resulted in much-higher distributions for income-seeking investors.
Viper paid out 60 cents per share for Q2, a whopping 81% year-over-year increase. That’s good for an indicated yield of around 5.7% at recent prices, and I have every reason to expect that payout to keep growing given trends in the Permian and the state of the energy market overall.
Finally, due to some tax law changes, Viper decided to convert from a traditional Master Limited Partnership to a corporate structure earlier this year. That means you don’t have to worry about complicated K-1 forms when it comes time to file your taxes. We recommend a positon in VNOM in our "bedrock income" portfolio.
