High Yields to Energize Contrarians
10/14/2014 7:00 am EST
Ian Wyatt takes a contrarian view of two high yielding, out-of-favor plays in the energy sector. The editor of High Yield Wealth suggests patient, long-term investors consider a coal royalty trust and a player in the oil drilling sector.
Natural Resource Partners (NRP)
We suggest that you ignore the coal is dead narrative. It's untrue. Worldwide, coal is still the second-most-consumed energy source, trailing only oil. Here in the States, coal is still very much in demand.
Despite the EPA's anti-coal rhetoric, the US Energy Information Administration predicts that coal's share of electricity production will actually increase to 40.3% from 39% in 2014.
And even if you are leery about coal, keep in mind that over the years NRP has been diversifying its asset base. Over the past five years, NRP has acquired oil and natural gas and other mineral reserves and has successfully leased these assets for royalty payments.
Many investors buy into coal's imminent demise. We still think it has a future but NRP is smart to diversify to better insulate itself from the vagaries of the coal market.
With coal prices depressed, investors have an opportunity to pick up yield (10.4%), and, yes, even growth, in one of the most misunderstood commodities on the market.
Diamond Offshore Drilling (DO)
It's been an absolutely miserable year for offshore drillers. Across the board, we see share price drops of 30% to 50% year-to-date.
The price decrease has motivated the oil giants to reduce capital expenditures. In turn, day rates on deep-water drilling rigs have declined while the number of idle rigs has risen.
This is all bad news, to be sure, but we've seen these cycles play out before. If you like contrarian investing, you should like Diamond Offshore, which specializes in deep-water drilling rigs.
The company has endured these troughs before, and it's rebounded to thrive, thanks to a conservative capital structure and an experienced, battle-tested team of managers.
So we are not throwing in the towel. Longer-term, we are optimistic. We expect the major exploration companies to continue to push into deep-water energy fields.
The present is unpleasant, to be sure, but if contrarian investing were easy everyone would do it. If you have a long-term perspective, as we do, Diamond Offshore—yielding over 9%—has the potential to produce exceptional long-term.
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