Back to fossil energy sector with 10+% yielders

power-poles-503935_6401 Back to fossil energy sector with 10+% yielders

 Energy investing…. I have had zero position in fossil based energy stock like oil and gas sector for long time. Now I have made two investments and this article tries to rationalize logic behind this.

Energy sector recap(last ten years)

Energy transformation has begun in our energy system. Also low oil prices have been burden to the oil and gas sector for quite some time now. All started with advances in deep drilling technology and fracking. Supply from shale oil and gas increased more than markets needed and prices sank. Everybody though that OPEC (the oil cartel) would start t regulate down their drilling to support prices. However Arabs and Russia did not want to reduce drilling and they created a coordinated effort to try to kill US shale oil companies which were in many cases only profitable with plus 55 dollar oil. Or in other perspective, they just continued like they had and did not care about lower prices because they production cost is very low. Also in later years economic situation in Russia had gone bad because oil price and global sanctions because Ukraine situation. This meant that unlike Saudis, Russia does not have financial possibility to reduce drilling.

The tactic worked to some extent. Large number of companies went down and there was a lot pressure also in finance sector due to high amount of lending to these shale oil companies. But then things stabilized for some time. There was no big collapse. Good thing about shale oil is that nature of the business is that holes don’t produce for quite long. This means that you can easily reduce the operation cost if you decrease the drilling speed. Counter argument is of course that you need to still pay the bank no mater the oil price. All in all. The effect of OPEC choice was vanishing. And after long arguing, OPEC decided to cut production.

Moving on to my reasoning

My decision to not to invest was not related to OPEC or oil price directly. It was just based on facts that there has been very positive global sentiment for climate change battle for long time. Even China and USA made promise for amendments greenhouse gas emissions cuts and both have actually now ratified Paris climate deal.
But all is not lost in this investment class because real world is different from Solar and Wind utopia. Yes, that will be the future but meanwhile we need a lot of balancing power. Balancing power is needed because there are times when we need power but there neither is enough wind or solar. Balancing power can come from various sources like from eco friendly hydropower but that is limited and what is also very good source is gas power. Gas has lower CO2 emissions than oil and can be used in similar power plants. Gas motors and turbines are in key role in the transition to higher share of renewables in near future. Higher oli prices will also improve gas market because fuel are interchangeable in some applications.

Two high yield picks

Golar LNG Partners Limited Partnership (GMLP)

 bilde1 Back to fossil energy sector with 10+% yielders
“Golar LNG Partners LP owns and operates floating storage regasification units (FSRUs) and liquefied natural gas (LNG) carriers under long-term charters in Brazil, the United Arab Emirates, Indonesia, and Kuwait. The company also engages in the leasing of its fleets. As of April 29, 2016, it had a fleet of six FSRUs and four LNG carriers. Golar GP LLC serves as the general partner of Golar LNG Partners LP. The company was founded in 2007 and is headquartered in Hamilton, Bermuda. Golar LNG Partners LP is a subsidiary of Golar LNG Limited.”(yahoo finance)
Good thing about transporting gas is that as long as there is demand, it needs transporting. However higher the price, more it makes sense to transport it to longer distances.
Company reported 15% increase in cash flow and 8% EBITDA growth in last quarterly report(September).
Current yield 11.2%

Dynagas LNG Partners LP (DLNG)

clean_energy1 Back to fossil energy sector with 10+% yielders
LNG tanker from Dynagas
“Golar LNG Partners LP owns and operates floating storage regasification units (FSRUs) and liquefied natural gas (LNG) carriers under long-term charters in Brazil, the United Arab Emirates, Indonesia, and Kuwait. The company also engages in the leasing of its fleets. As of April 29, 2016, it had a fleet of six FSRUs and four LNG carriers. Golar GP LLC serves as the general partner of Golar LNG Partners LP. The company was founded in 2007 and is headquartered in Hamilton, Bermuda. Golar LNG Partners LP is a subsidiary of Golar LNG Limited.”(yahoo finance)
Very similar case as Golar. Distribution coverage is about 1.39 and current yield is very attractive 10.79%. Analyst estimates have risen this quarter to $1.85 per share to $1.97 per share of projected yearly values.

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