A Cheap Energy Yield Play

 | Jun 20, 2013 | 2:00 PM EDT
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I was awoken this morning by a huge crack of thunder from a storm that rolled through Miami. The storm only lasted a few hours and the sun is coming out again as I write this article in the Magic City.

I think this is an apt metaphor for what has gone on in the market over the last 24- hours on the Fed's latest words and the backup in 10-year Treasury yields. The interest rate rise over the last six weeks has hit the dividend paying sectors like utilities, REITs and consumer staples particularly hard. Most of the financial punditry seems to be advocating that this is likely to continue and investors are better off rotating to growth sectors like technology, industrials and energy.

I agree with that consensus to a large extent and those sectors are where I have most of my stocks in the growth part of my portfolio. I am also using the pullback in income stocks, however, to start to build positions in good yield stocks with the significant amount of cash I have raised in my portfolio over the last few months.

For example, I like the hotel REIT space here as revenues per available rooms are growing, little new supply is coming on line and many of these entities are trading below what their properties would fetch in the current market. Two of my favorites in which I have started to build positions within the last week are Diamondrock Hospitality (DRH) and Summit Hotel Properties (INN).

I also like the energy sector for yield, including both stocks and master limited partnerships -- especially for entities that have had a significant selloff recently but have gotten too cheap. Late Wednesday, I started to build a position in refiner PBF Energy (PBF). It will be the subject of today's column.

Company Overview:

PBF Energy is one of the largest independent petroleum refiners and suppliers of unbranded transportation fuels, heating oil, petrochemical feedstocks, lubricants and other petroleum products in the United States. The company owns and operates three domestic oil refineries in the eastern part of the country and has processing capacity of approximately 540,000 barrels per day.

PBF came public at $26 a share in late 2012. It shot up past the $40 a share earlier in 2013 on the strength in the refinery sector. The stock has fallen back to the original IPO price, however, on a poor earnings report as renewable fuel credit expenses took a bigger bite out of profits than expected.


With the recent decline in the stock, PBF sells at less than 7x this year's projected earnings and 5x the current consensus for earnings for FY2014. PBF also yields 4.5% and has just a 30% payout ratio on 2013's consensus earnings projections. The median price target of the five analysts that cover the stock is $36 a share.


The company has several catalysts that should lower costs and improve margins nicely over the near and medium term. First, renewable fuel credit expenses should decline in the second half of the year as volume of ethanol blending increases.

Second, the company is expanding rail capacity to take additional Canadian crude. Its projected daily volume of this feedstock should go from 17,000 barrels per day currently to 80,000 bpd by end of 2014. This should also result in a drop of $4.50 a barrel in transportation costs when the ramp up is completed.

Finally, it has a variety of efforts to upgrade its Toledo facility. The company believes this set of upgrades will cost a total of $85 million and add over $75 million to annual earnings before interest, taxes, depreciation and amortization.


After falling some 35% from its highs in March, PBF is priced at around 5x 2014's projected earnings. It also yields 4.5% and the company has several positive catalysts in the works. It is a cheap yield play to average into, in my opinion.

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