This commentary was originally distributed to Dividend Stock Advisors subscribers at 1:07 p.m. on Dec. 8, 2015. Click here to learn more about the Dividend Stock Advisor portfolio.
The latest decline in energy prices following last week's annual OPEC meeting has once again called into question the safety of dividends in the oil and gas sector. Of particular concern are the dozens of master limited partnerships (MLPs), which similar to real estate investment trusts (REITs), are designed to generate steady income for investors.
The benchmark of this group, the Alerian MLP ETF (AMLP), has lost nearly 25% in the last month and 7% on Monday alone, clearly overshadowing the median 10% annual dividend yield in the group. It's worth reminding readers that a dividend yield in any industry that reaches the double digits in this low interest rate environment means investors are concerned the payout could be cut in the near term.
Even Kinder Morgan (KMI), long considered the cream of the MLP crop, has not been sacred. Rising debt levels to fund acquisitions and declining energy prices caused Moody's to place the company's debt on watch for a potential downgrade to junk status. Questions about the resulting stability of Kinder's dividend has seen the yield soar to 12.4%.
I'm not making a call on Kinder Morgan's dividend here because it is a fluid situation and the board of directors has several different options on its plate. Rather, today I've identified two other energy MLPs with double-digit yields that I believe can fund their dividends through 2016, which appear considerably more attractive than they were a month ago.
Up first is Oneok Partners (OKS), which closed Monday at $25.21, indicating a yield of 12.5%. The company currently pays out a quarterly distribution of $0.79 a share, with the next dividend likely to come in February 2016.
Management has spent 2015 renegotiating a lot of its contract to fee-based arrangements, in anticipation of lower natural gas and natural gas liquids (NGL) volume and pricing. Oneok Partners is targeting fee-based revenue of more than 70% in its gathering and processing business in 2016, up from 50% this year.
This was evident when Oneok Partners posted in-line quarterly results back in October, reaffirming its cash flow guidance, including the expectation to earn at least as much as its expected distribution in 2016. Many MLPs are expected to fall short on this front in the coming quarters, which will cause them to try and raise more funds in the secondary market in order to maintain their dividend and credit ratings.
In the meantime, the company has a BBB credit rating, which is two levels above junk status and management does not expect a need for new equity issuance through at least the first half of 2016. Investors looking to sift through the carnage in the energy MLP space should consider Oneok Partners in the mid-$20s.
Another name that has caught our eye this week is Williams Partners (WPZ), which closed Monday at $22.00, indicating a yield of 15.45%. The company currently pays a quarterly distribution of $0.85 a share, with the next dividend likely to come in February 2016.
Williams Partners delivered better-than-expected quarterly EBITDA in the third quarter, aided higher realized NGL margins. About 88% of the company's business is fee-based and management is consistently generating enough cash flow to cover the quarterly distribution. Looking ahead to 2016, William Partners should also see higher income flowing in from Williams Cos. (WMB), which will cut costs, following its pending merger with Energy Transfer Equity (ETE).
Like Oneok Partners, Williams Partners also has a stable BBB rating on its debt, with no major maturities coming due until 2020. This coupled with a healthy backlog of fee-based projects slated to come on line in the coming quarters, should allow the company to not only maintain its current distribution, but potentially increase it in 2016.
Stay tuned in the coming days and weeks as we will uncover more energy MLPs with sustainable, above-average yields and others with payouts that are risk of being cut in the coming months.