Opportunities in High-Yield Energy

06/29/2012 10:30 am EST

Focus: STOCKS

Elliott Gue

Editor and Publisher, Energy and Income Advisor and Capitalist Times

The decline in crude oil prices has hit many of the MLP and energy trusts fairly hard, but in the opinion of Personal Finance’s Elliott Gue, this also creates some opportunities.

High-income energy: Where the deals are? We’re here with Elliott Gue, who’s going to tell us.

Well, high-income energy stocks have been hit alongside oil prices in recent weeks, and really what we’re seeing is a correction in oil prices.

Oil ran up a lot in the beginning of the year. Most of these high income stocks, typically your MLPs, as well as some of your US royalty trusts, they really ran up with energy, ran up with the stock market, and are now getting hit.

I think that’s creating a lot of opportunities. A lot of these stocks got well above my buy targets earlier this year. I actually recommended selling out of some of them a few months ago. But now they’re pulling back into an area in which I consider them to be a pretty good buy candidate.

They’re also now paying, obviously, higher yields, because when the price goes down, in many cases, their dividends or distributions aren’t going to be affected. They’re actually offering a much nicer yield now than they were just a few weeks ago.

With some of those…would SandRidge be one of those?

SandRidge (SD) is the parent company. They’ve sponsored a number of US royalty trusts. One is called SandRidge Mississippian I (SDT) one, another one is called somewhat not creatively SandRidge Mississippian II (SDR). They also have a SandRidge Permian Basin Trust (PER).

I like, of those three, SandRidge Permian Basin Trust. That company is primarily an oil producer. They have a number of wells in West Texas, which is where the Permian Basin is. These are very mature wells seeing declining production, but the key is they are drilling a number of new wells there.

So, they’ve got over 500 producing wells, and they’re going to drill another 888 wells in that area between now and early 2015. As they drill those new wells, production is going to ramp up. That’s going to create distribution growth, and I don’t think that a lot of investors have fully understood that yet.

As distributions grow, they could easily yield in 2013 well upwards of 10%. Again, primarily oil production, so no exposure, or very, very, very little exposure to natural gas prices. So, I think that’s a very attractive one.

Sand Ridge Mississippian II…one reason I like that is it’s a very new IPO. It came public in April, and it still hasn’t paid its first distribution. So, a lot of brokers are still showing it as a zero yielder.

The reality is it’s probably going to yield close to 12%, 13%, 14% over the next 12 months. But until it pays a dividend, a lot of people are ignoring it. I think when they pay their first distribution, you’re going to see a lot more attention paid on this.

Right, everybody wants that, everybody will dive in.

From 0% to 12% virtually overnight. I think a lot more people are going to pay attention to it.

Ultimately, that yield will come down as there’s more involvement in the stock, right?

As the price gets pushed up, typically with these IPOs what we see is they come public with little fanfare.

I mean, everybody knows about Facebook (FB) coming public. Who knew about SandRidge Mississippian II? Unless you were actually watching for that thing to come public, it was a footnote. Nobody got into it in their early days. I mean, the volume was quite low.

Then, a month or so later, the banks released their quiet periods. They start issuing buy recommendations on it, and that generates some interest. And then they pay their first distribution. That generates a lot of interest.

And then I think over the next two or three years, as they ramp up production, those distributions are going to continue to rise, and so people are going to be attracted to that growth. So I definitely like buying these trusts early in their stage of development when they’re still showing a lot of growth potential.

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