An Aggressive Trio of Utilities

07/24/2017 2:52 am EST

Focus: UTILITIES

Roger Conrad

Founder and Chief Editor, Capitalist Times

While our conservative portfolios hinges on shares of high-quality stocks, our aggressive picks often dig deeper into value territory for potential turnaround stories, notes Roger Conrad, leading utility sector expert and editor of Conrad's Utility Investor.

Atlantica Yield (ABY) continues to work on securing waivers to cross-default and ownership restrictions that have prevented the yieldco from fully harvesting cash flow from contracted power plants in Mexico and South Africa.

First-quarter results also took a hit from some operating challenges and weaker-than-expected conditions for solar power.

Fortunately, all these setbacks appear temporary, and management expects to secure cross-default waivers on the remaining facilities this summer, setting the stage for further dividend growth.

The yieldco also purchased a 12.5 percent interest in a 114-mile power transmission line running from Arizona to California that’s expected to enter service in 2020.

Uncertainty about when and how Abengoa (Madrid: ABG) will monetize its 41.47 percent equity interest in Atlantica Yield continues to weigh on the stock. But investors should receive another dividend increase this fall to reward them for their patience.

Atlantica Yield rates a buy up to $22 for aggressive investors and could rally above $30 per share if Abengoa sells its equity interest to a partner that has the wherewithal to support the yieldco’s growth story.

Our position in oil and gas producer Energen Corp. (EGN) represents a bet that upstream operator will continue to post strong drilling results on its acreage in the Permian Basin, enabling the company to grow its hydrocarbon output by at least 20 percent per year.

The exploration and production outfit has the asset base, balance sheet and hedge book to deliver on this goal in an environment where energy prices remain lower for longer.

These qualities also make Energen a potential takeover target for larger oil and gas producers with contiguous acreage or those seeking to establish a foothold in the area.

The multiple oil-bearing formations in the Permian Basin offer some of the best economics among US shale plays, as producers can use the same infrastructure to target multiple formations.

Activist hedge fund Corvex Management reportedly purchased a 5.5 percent stake in the company, perhaps setting the stage for a blockbuster deal.

A recovery in oil prices would also super-charge the stock. Aggressive investors who can stomach the volatility and don’t mind the lack of a dividend can buy up to $60.

Telefonica (TEF) has met our criteria for remaining in the Aggressive Income Portfolio, and the American depositary receipt (ADR) has fared well this year.

The telecom giant continues to reduce its debt load, hastening the day when it can return to dividend growth. A transformative transaction to monetize a portion of its business in Mexico, Colombia and/or the UK could accelerate this healing process.

Even without a deal, Telefonica has built a dominant position in Brazil’s wireless market through its superior network quality and has continued to take share during the downturn.

Although recent political turmoil hasn’t helped matters, Telefonica stands to benefit handsomely from an eventual stabilization and recovery in Brazil’s economy.

Meanwhile, Telefonica’s best-in-class network in Spain’s intensely competitive market has helped the company’s profit margins to recover in its home country. Telefonica’s New York-listed ADR rates a buy up to $12 for aggressive investors.

Subscribe to Conrad's Utility Investor here…

Related Articles on UTILITIES

Keyword Image
Profits Flow at Aqua America
10/19/2017 5:01 am EST

If anyone needed a reminder of how essential utilities are to our lives, the recent devastation from...