Two Energy Plays for Good Times and Bad

06/17/2010 1:00 pm EST

Focus: STOCKS

Roger Conrad

Founder and Chief Editor, Capitalist Times

Roger Conrad, editor of The Utility Forecaster and associate editor of Personal Finance, likes a master limited partnership and a natural gas distributor.

Today’s market turmoil has little to do with the underlying fundamentals of healthy, dividend-paying companies.

This latest swoon has everything to do with overblown fears that 2010 will be revisited by the ghost of credit crunches past.

But the time is ripe to pick up units of Genesis Energy LP (NYSE: GEL).

Genesis owns and operates crude-oil-gathering, marketing, and pipeline assets, and has increased its distribution for 19 consecutive quarters. Last year, management increased the payout 8.9%.

A portfolio of fee-based assets and a blue-chip customer base, along with systematic hedging of commodity price exposure and conservative debt and payout policies, have enabled the firm to sustain distribution growth.

Genesis’s concentration on the US Gulf Coast and disappointing first-quarter earnings are two more reasons for the stock’s recent underperformance. But the oil spill in the Gulf of Mexico has yet to impact the firm’s operations.

In the [master limited partnership]’s first-quarter conference call, [chief executive officer] Grant Sims asserted that Genesis has “seen the bottom” and is hunting “opportunities to grow through acquisitions.”

Even in the first quarter, Genesis covered its distribution comfortably. And there’s little risk that the company’s only substantial debt—credit agreement up for renewal in 2011—won’t be rolled over. Genesis is a Buy up to $20. (It closed below $19.50 Wednesday—Editor.)

With Atmos Energy (NYSE: ATO), we can count on earnings and dividends to grow in good times and bad.

Under the leadership of chairman and CEO Robert Best since its 1983 inception, the company operates six natural gas distribution utilities serving three million-plus customers in 12 states, pipeline/storage assets, and a marketing arm focused on maximizing asset values.

Atmos’s stock wasn’t immune from the 2008 market meltdown, touching a low of under $21 before bouncing back. Its underlying business, however, was a rock. Earnings continued to grow at the same 5% compound annual rate they have since 2005. Management raised dividends for the 27th consecutive year and cut debt from 54% to 48% of capital.

Atmos’s regulated assets generate 80% of earnings. Changes in fuel costs are automatically passed into rates. And the company earns on 96% of capital investment within a year. Expected capital spending of $520 million will compound rate base and earnings by 3.7% to 4.4% annually through 2014.

The recession and its aftermath have slowed customer growth and diminished opportunities in energy marketing, and there’s some debt to refinance in 2011. But with regulated earnings alone covering the payout, Moody’s raising the credit rating, and the company’s ten-year debt yielding less than 5% to maturity, there’s not much “Big W” risk, even in a worst case.

And there’s upside—possibly from another acquisition—as the economy improves. Atmos Energy is a low-risk Buy up to $30. (It closed below $28.50 Wednesday—Editor.)

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