Not that nothing else matters—the price of natural gas and natural gas liquids is important—but my theory is that at the moment, in the current cheap money environment, the crucial thing that investors in energy MLPs (master limited partnerships) need to know is whether one of these dividend generating machines has enough new projects to keep distributions to investors climbing.
Since master limited partnerships by law must distribute all of their income to investors, the way one of these companies grows is by raising money in the financial markets and then investing it in new pipelines, distribution hubs, refineries, processing facilities, and the like. With money so cheap right now, thank you Ben Bernanke and Janet Yellen, it’s easy for a master limited partnership to profit from the spread between the cost of borrowing money and the returns that projects produce. The hard part right now—after so much money has gone into master limited partnerships to be put to work in the U.S. energy boom—is finding enough good projects to keep the cycle going.
From that perspective, the March 31 update from Targa Resources Partners (NGLS) was extremely good news. The MLP announced that because of an increase in exports of liquid petroleum gas first quarter EBITDA (earnings before interest, taxes, depreciation, and amortization) would be 60% higher than in the first quarter of 2013.
Liquid petroleum gas isn’t the same as liquefied natural gas. LPG is made from natural gas liquids and it is largely made up of propane and butane rather than the methane of natural gas. Exports of liquid petroleum gas fall under a completely different regulatory scheme than exports of liquefied natural gas. The United States became a net exporter of liquid petroleum gas for the first time ever in 2012 and exports are projected to grow until the United States becomes the world’s top exporter sometime around 2020. The biggest market is Asia where it’s used both for heating and increasingly as the feedstock for chemical production.
All those exports to Asia mean a lot of opportunity for investment in new infrastructure.
Which along with that increase in EBITDA was the big news from Targa on March 31. Targa’s liquid petroleum gas export capacity climbed to 3.5 to 4 million barrels a month by the end of 2013 and the company projects that it will reach 5.5 to 6 million barrels by then end of 2014.
In addition to the $650 million in previously projected capital spending to reach that goal, Targa will add another $50 million in capital spending in 2014 to build a plant to split liquids into butane, propane, and other components. (Total cost for the splitter will be $115 million with the splitter to go into service in 2016/2017.) The company also said it will build a new processing plant in the Bakken shale gas region.
Targa is a member of both my Jubak’s Picks portfolio and my Dividend Income portfolio. (The master limited partnership paid a 4.9% dividend as of closing price on April 4.)
As of April 4 I’m raising my target price on Targa to $60 a unit in both the Picks and Dividend Income portfolios. (Traditionally I haven’t put target prices on picks in the Dividend Income portfolio, but I’ve have decided to add them gradually as I update these picks.)
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 units of Targa Resources Partners as of the end of December. In preparation for closing the fund at the end of May, as of the end of March I had moved the fund’s holdings almost totally to cash.
Not surprisingly Targa Resources Partners (NGLS) has show a little weakness recently after the February 14 date (record date January 28) for paying the master limited partnership’s fourth quarter dividend.
What’s surprising is how small the retreat has been. I suspect that this strength in a dividend-paying stock after the dividend payout is a sign that investors are feeling a little less aggressive and a little more conservative at current high.
The retreat wasn’t very large—from $41.88 on February 14 to $41.04 on February 20—but decline pattern is normal for stocks and master limited partnerships (MLPs) that pay hefty dividends. (Targa showed a projected dividend yield of 6.5% at the February 14 price.) Some holders of the stock, having collected the quarterly dividend, sell with the idea of buying something else about to pay a dividend and maybe returning to hold Targa closer to its next dividend payout.
The dividend for the fourth quarter of 68 cents per unit ($2.72 per unit on an annual basis) is a 3% increase from the third quarter and a 13% increase from the dividend in the fourth quarter of 2011. The partnership continues to project a 10% to 12% increase in distributions for 2013.
If you believe those projections, and I think they’re reasonable, then that $2.72 in dividends turns into $2.99 to $3.05 a share at the end of 2013. And that would equate to a $45 a unit price and at a 6.8% yield at end of the year. (Which is–$45 by December 2013—what I’m going to set as my new target price for Targa in my Jubak’s Picks portfolio http://jubakpicks.com/the-jubak-picks/ .)
On February 14 Targa Resources Partners reported financial results for the fourth quarter of 2012 and for the full 2012 year. Read more
Quick, name the best performing sector for 2013 to date.
Did you say energy? The sector is up 8.6% for the year as hopes for global growth (or is that hopes of Chinese growth?) drive visions of growing global demand. West Texas Intermediate crude is up another 1% today and Brent crude is up 0.6%.
Shares of U.S. refiners with geographic exposure to the U.S. oil boom in regions such as North Dakota’s Bakken formation or Texas’ Permian Basin have done as well—HollyFrontier (HFC) is up 8.4% in 2013—or better—Marathon Petroleum (MPC) is up 13.9%.
And going forward I think refiners with U.S. oil boom exposure are likely to outperform in any dip in the sector created by worries that higher oil prices will put a damper on global growth. (Well, oil prices could at some point. At $97.40 a barrel for West Texas Intermediate and $114.16 for Brent, oil is near the point where its price does start to bite into growth.)
Why are U.S. refiners a good bet to keep climbing even in a dip for the rest of the sector? Read more
I added Targa Resources Partners (NGLS) to my Dividend Income portfolio http://jubakpicks.com/jubak-dividend-income-portfolio/ on January 11 because the units offer a really attractive potential for dividend growth and capital gains. The current dividend, at 6.81% on January 11, isn’t any too shabby either. (For the most recent update on that portfolio see my post http://jubakpicks.com/2013/01/11/reformatting-my-dividend-income-portfolio-for-a-period-when-dividend-investing-gets-more-important-and-tougher-too/
The big upside here comes from Targa’s acquisition of oil and natural gas pipelines from Saddle Butte Pipeline that for the first time moved Targa into the Bakken shale formation of North Dakota that is the heart of the U.S. oil boom. The deal also gave Targa its first oil pipelines—before that Targa had been a natural gas only pipeline play. The North Dakota oil boom is currently very underserved by pipelines, which gives pipeline companies with footholds in the area, and that now includes Targa, an opportunity to invest today’s cheap money in profitable new capital projects.
After the deal Targa reiterated its projections for 10% growth in distributions to holders of the MLP (master limited partnership) units in 2013 from 2012 levels. Read more
Wouldn’t ya know it?
Just when dividend investing is getting to be more important—becoming in my opinion the key stock market strategy for the current market environment—it’s also getting to be more difficult to execute with shifting tax rates and special dividends in December 2012 distorting the reported yield on many stocks.
I think there’s really only one real choice—investors have to pull up their socks and work even harder at their dividend investing strategy. That’s why with today’s post I’m revamping the format of the Dividend Income portfolio I’ve run on JubakPicks.com (and it’s precursor on MSN Money and Moneyshow.com) since October 2009. The changes aren’t to the basic strategy. That’s worked well, I think, and I’ll give you some numbers later on so you can judge for yourself. No, the changes are designed to do two things: First, to let you and me track the performance of the portfolio more comprehensively and more easily compare it to the performance turned in by other strategies, and second, to generate a bigger and more frequent roster of dividend picks so that readers, especially readers who suddenly have a need to put more money to work in a dividend strategy, have more dividend choices to work with.
In this post I’m first going to give you a brief explanation for why I think dividend investing is so important right now—and I’m even going to argue that dividend investing might be the single best strategy for this market environment. (And that’s an important argument, in my opinion, since I think this market environment is going to persist for years.)
Then I’m going to lay out the changes in how I’m going to track this portfolio going forward and give you some numbers so you can judge the performance of this portfolio since 2009 and particularly in 2012.
And last I’m going to give you a pick to replace one stock in the current portfolio that has been a disappointment and also two new picks—that’s three picks in all—as part of an expanded dividend portfolio.
So why is dividend investing so important right now in my opinion?
For the last nine months or more, I’ve been writing about what I’ve called the new paranormal market. To catch up if you’ve missed the foundation of this argument see my post from March 2012 http://jubakpicks.com/2012/03/02/call-it-the-new-paranormal-market-youll-need-some-new-investing-tools-but-the-profits-are-out-there/. The premise of my argument is that we’ve entered a period of relatively low returns. Bill Gross, the bond guru at Pimco, calls this period the “new normal” and believes that we’ll be lucky to see average annual returns of 5% a year during this period, which could stretch out for a decade. In my model for the “paranormal market” I’ve added a wrinkle to Gross’s model. Not only will average annual returns be low by the standards of the great bull market that governed the 1980s and 1990s, but also markets will be extraordinarily volatile. So, yes, you might see an average annual return of 5%, but that average will include years of 10% or 15% drops as well as substantial rallies, and it will include years like 2011 when the market will produce a half dozen swings of 7% or more in a month as it did in August. The challenge will be to stay in through the volatility and avoid buying high in moments of market optimism and selling low when everything seems to be headed for ruin—or to find a way to sell more often at market highs and to buy more often at market lows.
Why do I believe that there’s any validity to either Gross’s “new normal” or my “paranormal” market? I’m skeptical of attempts to argue for long-term market trends while we’re in the midst of the action. What seems like a trend can so easily turn out to be just a part of a longer data series pointing in a very different direction. So I’m reluctant to say that just because average returns have been so “modest” and so volatile lately that they must continue that way for some future period. (The cumulative return on the Standard & Poor’s 500 Stock index is 13.4% for 2012, 27.9% for the last three years, and -2.87% for the last five years.)
What I find convincing about the “new normal” and the “new paranormal” models is the match between the market performance data and the underlying fundamentals of the global financial system. In the last decade or more we’ve seen long term trends—the integration of more countries into the global economy, the rise of new economic powers, big changes in the location of global cash balances and in the direction of global cash flows (as emerging economies emerged and developed economies aged and slowed)—that have challenged the global financial system.
And while the global financial system has survived, by and large, the cost has been huge actions and re-actions by the world’s central banks that have sent waves of cash sloshing across the world. That has led to massive market bubbles created by the overshoot of central bank policies (cheap money and the technology boom and bust, cheap money and the real estate boom and bust, cheap money and the global financial crisis.)
The period has combined falling real returns as globalization increased competitive pressures on bottom lines and as aging stressed global retirement systems with rising volatility as ever expanding central bank balance sheets led to a cycle of booms and crashes. The strongest argument for a period of “new normal” or “paranormal” returns is that the trends that have pushed down returns on capital (globalization and aging) continue to work—and that central banks now face the challenge of supporting the global economy with new cash infusions even as they confront huge balances that require them to exit these markets.
I’d love to see any logic that holds that this is a recipe for steady positive returns.
Why is dividend investing so important in this environment? Read more