|Company||Symbol||Date Sold||Sell Price||Price Now||Today's Change||Gain/Loss Since Sale|
|Update June 28, 2015: Update: February 3. Today, February 3, before the New York market opened, Hi-Crush Partners (HCLP) reported earnings of 85 cents per unit in the fourth quarter of 2014. That was... more Read Jim's Original Sell|
|Holly Energy Partners||HEP||07/02/2015||$34.50|
I’m going to sell my position in Holly Energy Partners (HEP) out of my Dividend Income portfolio tomorrow July 2.
The master limited partnership has been a steady distributor of cash... more
On May 11 I posted that I would sell Ensco (ESV) out of my Dividend Portfolio on May 12. I’ve been slow in posting the actual sell, however, and the... more
I’m going to use today’s (July 18) rather surprising upward move in US stocks-despite a big upswing in market nervousness yesterday-to sell Pfizer (PFE) out of my Dividend Income portfolio http://jubakam.com/portfolios/jubak-dividend-income/.... more
|Kinder Morgan Energy Partners||KMP||08/13/2014||$93.35|
|Update September 17, 2013: The run up in U.S. interest rates and worries in the weeks leading up to tomorrow’s Federal Reserve decision on whether or not to begin reducing the central bank’s monthly... more Read Jim's Original Sell|
June 28, 2015Update: February 3. Today, February 3, before the New York market opened, Hi-Crush Partners (HCLP) reported earnings of 85 cents per unit in the fourth quarter of 2014. That was 5 cents a unit below the Wall Street consensus projection for the quarter. Revenue climbed to $`30.9 million, well above the $108.9 million expected by analysts. Revenue increased by 104% from the fourth quarter of 2013. The units of this master limited partnership were up $2.52, or 7.75%, on the news as of 11 a.m. New York time. Why the huge bump? First, relief that the company came so close to earnings estimates at a moment when everybody is waiting for the bottom to fall out of the U.S. oil and natural gas from shale sector. Hi-Crush sells sand for use in fracking and it’s only reasonable to worry that demand and prices will fall as companies cut the number of rigs in use. Countering that logic, however, is the increased amount of sand being used per well as producers try to get more oil and natural gas out of each well in order to cut costs and increase production while drilling fewer new holes. Second, a big increase in distributable cash flow to $32.7 million that leaves the master limited partnership with a distribution coverage of 1.31 times the $24.9 million in distributions scheduled to be paid to unit holders of record as of January 30 on February 13. In 2014 Hi-Crush increased its distributable cash flow by 60% and increased its distribution by 32%. The distribution on February 13 is an 8% increase from that for the third-quarter of 2014. Hi-Crush now yields 8.3%, a yield that reflects investor worry about the sustainability of distributions and distribution growth during the current plunge in oil prices. Third, forward-looking statements from the company that stressed the stability of revenue for 2015. 88% of the company’s projected 2015 sand production is committed under long-term take-or-pay contracts. That’s down only slightly from the 90% under long-term take-or-pay contracts in 2014. Hi-Crush isn’t by any means out of the woods and the longer oil prices stay below $60 a barrel, the more at risk its distribution is. (Continuing the recent rally in oil, West Texas Intermediate was up another 3.3% as of 11 a.m. in New York to $51.16 a barrel.) Hi-Crush Partners is a member of my Dividend Income portfolio http://jubakam.com/portfolios/
I’m going to sell my position in Holly Energy Partners (HEP) out of my Dividend Income portfolio tomorrow July 2.
The master limited partnership has been a steady distributor of cash since I added it to the portfolio on May 31, 2013 with distributions equal to an 11.4% yield on the original purchase price of $35.96 as of the last distribution to holders of record on May 15. And the MLP still yields 6.1%. (The next distribution is likely to come to holders of record at the end of July. The next quarterly earnings report is now scheduled for August 4.)
But with any master limited partnership you want to see a solid stream of new investments that will growth distributable cash flow in the future and that future investment inventory looks thin for Holly Energy Partners right now. That’s a significant weakness in this master limited partnership as we get closer to an initial increase in interest rates from the Federal Reserve sometime as early as September or as late as December 2015.
A major portion of the growth in assets at Holly Energy Partners has come from the drop down of assets from refiner HollyFrontier (HFC), which spun off the MLP in 2004. But that cupboard of drop down assets from HollyFrontier is looking a little bare right now and asset growth at Holly Energy Partners looks like it will have to draw more on acquisitions in the sector at a time when volatility in the U.S. oil and gas sector is increasing raising the risk of these deals. This bare cupboard also comes just as incentive distribution rights kick in that increase the share of distributions flowing to HollyFrontier to 32% in 2018 from 23% in 2013. (HollyFrontier is the general partner in the MLP structure and owns 44% of Holly Energy Partners.)
I don’t think you have to sell Holly Energy Partners here—there is that 6.1% yield—but while the MLP has been on an upward trend since April, the volatility in that trend has been increasing. I’d expect those swings to increase in magnitude as the markets get closer to the first Fed interest rate increase. I wouldn’t mind having a little more cash available in this portfolio as volatility in the income sector increases. There’s always the chance of catching a bargain at a time like this.
As I noted, distributions on this pick equal an 11.4% yield. The price of Holly Frontier was down 4.06% from my purchase date as of the close on July 1. My total return on this position is 7.3%.
On May 11 I posted that I would sell Ensco (ESV) out of my Dividend Portfolio on May 12. I’ve been slow in posting the actual sell, however, and the usual recap of my logic. My apologies. Here’s that sell post now. On May 11, the shares closed at $26.13. On May 12, the close and sell price for the shares was $26.79. Today, the shares closed at $25.26. I missed the local high with my May 12 sell by a day. The shares closed at $27.35 on May 13.
The logic of the sell was simple: The rally in the shares of land-based and deep water drillers that went along with the rally in oil prices had gotten ahead of itself. Before a slight retreat on May 11, Ensco had been up 16.6% in the month.
The fundamentals of the deepwater drilling companies look likely to continue to deteriorate into 2016 as oil producers negotiate aggressively to cut their costs and a big back log of new rigs ordered near the market peak is set to hit the water in 2015 and 2016 before the schedule gets much lighter in 2017.
I suggested taking profits here before those fundamentals reasserted themselves in investors thinking.
Ensco’s quarterly earnings report, released on April 30, filled in some of those fundamentals. Ensco shows that 20 rigs (6 floaters and 14 jackups), roughly 30% of the company’s fleet, will roll off contract in 2015. Even if all of those rigs find new work, they’ll find it at lower day rates. Producers are determined to reduce costs by squeezing suppliers so that they can make money at $70 a barrel or lower and don’t need a return to $100 a barrel oil to turn a profit. In addition, drillers face a huge bulge of new construction. Estimates for the sector show 19 new rigs under construction for delivery in 2015 and 14 in 2016 before dropping to 4 in 2017 and 1 in 2018. (These figures don’t include rigs under construction in China.) Some of these will undoubtedly be delayed or even canceled, but their existence will help push down prices. Ensco itself has 3 drill ships and 3 jackup rigs under construction.
Total spend by oil producers on floaters will fall to $34 billion in 2015, down 8% from 2014, according to Credit Suisse with the analyst projections looking for another 10% to 15% drop in 2016 to $30 billion. If that projection turns out of be accurate, then I think we’re looking at capital spending on rigs bottoming in 2016 and a more sustainable rally emerging later in 2015 when that projection gets some confirmation from the data. I’d look to rebuy Ensco on that schedule.
I’m going to use today’s (July 18) rather surprising upward move in US stocks-despite a big upswing in market nervousness yesterday-to sell Pfizer (PFE) out of my Dividend Income portfolio http://jubakam.com/portfolios/jubak-dividend-income/. (The Standard & Poor’s 500 index was up 0.96% as of 3:00 PM New York time.)
After the failure of the big drug company’s efforts to buy AstraZeneca (AZN), Pfizer seems a cash cow without a strategy. Not that the attempt to buy AstraZeneca was birilliantly creative-the deal would have let Pfizer move its tax-jurisdiction to the United Kingdom from the United States for huge savings. But it wouldn’t have done much if anything to fix the combination of ineffective research and expiring patent protections (Celebrex, the company’s $2.9 billion (in 2013 sales) arthritis blockbuster, is scheduled to go off patent in 2015) that are projected to slow sales growth to a crawl. Morningstar projects Pfizer’s sales growth at 1% a year over the next decade; share buybacks will raise earnings per share growth to 3% a year. In its year-by-year earnings per share projections, Credit Suisse calls for earnings per share to grow to $2.24 in 2014 from $2.22 in 2013, and then to $2.30 in 2015, and $2.61 in 2016.
Even with a 3.4% current dividend yield, those projected growth figures don’t add up to much in the way of upside capital appreciation.
If all I was looking for at the moment was safety, however, I’d consider hanging onto Pfizer.
But the combination of rising nervousness-the VIX volatility index climbed by 32% yesterday-and a rise in geopolitical tensions argue that I’d like to have a little cash on hand in case events in the Ukraine or in Gaze over the next few days result in a drop that might give me a buying opportunity in a dividend stock with a higher yield and better prospects for capital gains.
I would also probably hang onto Pfizer if I didn’t have a good replacement up my sleeve-but I do (and I’ll tell you what it is next week) and so it’s time to sell with a small 0.63% loss in share price (made up for by that near 3.5% dividend) since I added these shares to the Dividend Income portfolio back on February 6, 2014.
The stock goes ex-dividend on July 30 in case that income in hand (as opposed to capital locked up in the share price) is important enough to lead you to think about putting off a sale. (Share prices do tend to drop after the payout to match the dividend payout. Otherwise, if you think about it, dividends would create value for investors out of what is actually a distribution of cash that lowers the balance in a company’s treasury and raises it in shareholder wallets).
Full disclosure: I don’t own shares of any of the companies mentioned in this post in my personal portfolio. When in 2010 I started the mutual fund I managed, Jubak Global Equity Fund, I liquidated all my individual stock holdings and put the money into the fund. The fund shut its doors at the end of May and my personal portfolio is now in cash. I anticipate putting those funds to work in the market over the next few months and when I do I’ll disclose my positions here.
September 17, 2013The run up in U.S. interest rates and worries in the weeks leading up to tomorrow’s Federal Reserve decision on whether or not to begin reducing the central bank’s monthly purchases of $85 billion of Treasuries and mortgage-backed securities hasn’t been kind to dividend stocks, REITs (real estate investment trusts) or MLPs (master limited partnerships.) In fact pretty much anything that trades on yield has tumbled. For example, units of Kinder Morgan Energy Partners (KMP), a member of my dividend income portfolio http://jubakpicks.com/jubak-dividend-income-portfolio/ , had fallen from $83.35 on August 28 to $81.32 on September 10. That’s a pull back of about 2.4%. But the damage has gotten a lot worse in the last few days. On September 11 an analyst with Hedgeye Risk Management told Fox Business Network that Kinder Morgan was a house of cards,” that “Kinder Morgan’s issues are very concerning,” and that “there are some very misleading statements with some of the non-GAAP financials.” Investors should sell Kinder Morgan. (The analyst, Kevin Kaiser, seems to have been talking about all the Kinder Morgan companies: Kinder Morgan (KMI,) the general partner; Kinder Morgan Management (KMR), which pays distributions in shares rather than in cash; and Kinder Morgan Energy Partners (KMP), the cash-distributing MLP.) On that blast the units of Kinder Morgan Energy Partners have dropped to $78.17 at the close on September 17, a drop of another 3.9%. Since I was about to recommend buying Kinder Morgan Energy Partners on the drop—since the yield has climbed to 6.75%--I thought it would be a good idea to dig into the report and Kinder Morgan. My conclusion: I’m still recommending that you buy the units at this yield. If I wanted to be really cynical, I’d say the report from Hedgeye is an effort to profit—if you sell short—by playing on general fears of a decline in yield assets in light of the possibility of rising interest rates and that Morgan Kinder Energy Partners in particular and MLPs in general make a good target because relatively few of the retail investors who own MLPs understand all of the ins and outs of this financial instrument. If I wanted to be less cynical, I’d say that the report dredged up “issues” that really aren’t issues to those of us who have followed or owned Kinder Morgan Energy Partners for a long time. (I’ve owned Kinder Morgan Energy Partners off and on in one portfolio or another since 2005.) What kind of issues? Well, how about the charge that there are “some very misleading statements with some of the non-GAAP financials?” If I’m reading the Hedgeye report correctly, this refers to the way that Kinder Morgan Energy Partners reports maintenance capital. The report argues that the MLP is over-distributing cash flow because it under reports maintenance capital. This argument isn’t new—you can argue about what constitutes maintenance capital and growth capital. But importantly for investors Kinder Morgan has been consistent in how it treats this accounting over the years. I don’t see any evidence that the MLP has been shifting accounting treatments year to year in order to pump up cash flow from this source. Nor do I see signs that Kinder Morgan is starving its existing assets of maintenance capital in order to pump up cash flow. The report’s argument gets pretty convoluted here with charges that the company keeps maintenance capital spending low—either in fact or through accounting—to increase the distributions flowing to Kinder Morgan, the general partner, and Richard Kinder, the CEO of Kinder Morgan and cites accidents at Kinder Morgan’s pipelines as evidence of underspending. (The accounting here is interesting—if you’re an accounting geek since maintenance capital spending is deducted from distributable cash flow while growth or expansion capital spending isn’t.) But Kinder Morgan’s accounting practice and accident record seems within industry norms. One of the telltale flaws in the Hedgeye report comes here when the analyst pulls in a comparison with Chevron (CVX) and Exxon Mobil (XON) to argue that Kinder Morgan’s maintenance capital spending should be larger than it is. Kinder Morgan Energy Partners shows way less in capital spending than those oil companies, which, the report argues is a clear sign that something is wrong with Kinder Morgan Energy Partners accounting. Or, it could be, that Chevron and Exxon Mobil are oil companies with huge budgets for finding oil and developing oil fields and Kinder Morgan Energy Partners is mostly a pipeline company. Apples and oranges. If the report knows that, the argument is intentionally deceptive. If it doesn’t, then we don’t need to pay attention to this report. I think the report is aware of this problem because it tries to haul in Kinder Morgan’s energy production revenue—about 30,000 barrels a day right now—so that it can argue that Kinder Morgan Energy Partners is actually like Chevron. And then to bring in the argument that you shouldn’t invest in Kinder Morgan Energy Partners because oil prices could fall and that would endanger cash flow. And the report tries to find something sinister in the MLP’s oil production revenue by arguing that 1) most people don’t know about it, and 2) the company hasn’t disclosed the danger of falling oil prices. I can’t speak to what most people know about Kinder Morgan Energy Partners’ revenue from energy production—it’s pretty clear in its financials—but I do know that management has been upfront about the possibility that oil prices could fall. If Kinder Morgan Energy Partners is a “house of cards” on these grounds, then so is Exxon Mobil. Kinder Morgan management has, in fact, pursued a strategy of investing in natural gas pipelines, in order to reduce its exposure to a possible decline in oil prices and slowing growth in its CO2 unit, once the big growth driver. I think there are important questions to ask about Kinder Morgan Energy Partners before you invest. The key ones in this environment are can the company continue to raise capital to invest in new assets (since that’s what drives growing cash distributions) at a reasonable price and is the company able to find investment opportunities that generate a high return on investment? Historically, Kinder Morgan has been able to do both of these tasks very well and it looks like the company should be able to continue meeting those challenges for the foreseeable future. My only knock on Kinder Morgan Energy Partners is that, as a investor favorite in the pipeline MLP space, the units can get pricy. Thanks to the report from Hedgeye Risk Management that’s not a problem right now, however. Full disclosure: I don’t own shares of any of the companies mentioned in this post in my personal portfolio. When in 2010 I started the mutual fund I manage, Jubak Global Equity Fund http://jubakfund.com/ , I liquidated all my individual stock holdings and put the money into the fund. The fund did not own shares of any company mentioned in this post as of the end of June. For a complete list of the fund’s holdings as of the end of June see the fund’s portfolio at http://jubakfund.com/about-the-fund/holdings/