As regular readers of this column know, I depend on energy master limited partnerships for a good portion of my income portfolio. I particularly like entities participating in the impressive expansion of the domestic production, storage and distribution of gas and oil. I continue to believe we are in the early innings of a secular expansion that the Independent Energy Agency (IEA) says will have the U.S. energy independent by 2030.
I believe natural gas will continue to gain market share from coal in powering industrial and utility demand. Coal faces new potential regulations from the Environmental Protection Agency and resistance from an administration that is not in its corner, so natural gas should thrive in this environment. The fuel will eventually make inroads in consumer demand as well (for instance, natural-gas-powered cars and trucks). Oil infrastructure will also need to expand as we continue to produce more of our own domestic supply.
I also like that the tax treatment of these MLPs will likely remain stable compared with traditional income sectors, such as utilities and pharmaceuticals, that face dividend tax hikes in 2013.
Finally, these infrastructure plays tend to generate more fee-based revenue, thus they are less affected by volatile energy prices. Here are two new selections in this space that have solid distribution yields, good growth prospects, and both have had recent insider buying.
NuStar GP Holdings LLC (NSH) engages in the storage and transportation of petroleum products and anhydrous ammonia, and petroleum refining and marketing.
Four reasons to place NSH in an income portfolio at just over $26 a share:
- NuStar yields more than 8% and has doubled its distribution payouts over the past seven years.
- Insiders have bought more than $4 million worth of shares in the last two weeks.
- The eight analysts covering NSH have a median price target of $31.50 a share, decent capital appreciation potential on top of an 8% yield.
- NuStar Energy (NS) recently agreed to buy key energy assets from TexStar Midstream Services LP for $425 million. This will increase the company's exposure to the fast-growing Eagle Ford shale region, which bodes well for future revenue and cash-flow growth. (NSH has a general- and limited-partner interest in NS.)
Compressco Partners LP (GSJK) provides wellhead compression-based production-enhancement services to natural gas and oil exploration-and-production companies.
Four reasons GSJK is a good selection for an income portfolio at less than $18 a share:
- Although the company came public less than 18 months, it has been a consistent payer of distributions and currently yields 9%.
- Insiders have been frequent and consistent buyers of GSJK over the past few months.
- Consensus earnings estimates for both 2012 and 2013 have moved higher over the past two months.
- The company has easily beaten earnings estimates the last two quarters, and analysts project revenue will grow between 7% and 10% in 2012 and 2013.