Tag Archives: energy

What The $2.1 Billion Transaction Means For NextEra Energy Partners

Summary The company only holds renewal energy assets right now. Pipelines are backed by long-term contracts that should provide sustainable cash flow. However, when we look at the entire company as a whole, this acquisition adds little value. NextEra Energy Partners (NYSE: NEP ) is a company formed by NextEra Energy (NYSE: NEE ) to acquire and manage contracted clean energy projects with long-term cash flows. Through a controlling general partnership interest and a 22.2% limited partnership interest in the operating company, NEP OpCo., the company owns a portfolio of solar and wind power generating assets. Given the existing assets, it may come as a surprise to you that the company recently announced a $2.1 billion acquisition, consisting of solely natural gas pipelines. Let’s learn a bit more about this transaction. The Transaction The acquisition includes seven natural gas pipelines located in Texas. The pipelines currently have capacity of 4 Bcf per day with 3 Bcf already contracted with ship-or-pay contracts. So right off the bat we can see that there is growth potential without additional capital spending. While utilization seldom reaches 100%, the current rate of 75% clearly has additional room for improvement. The management also mentioned that is already an expansion project underway and would be providing an additional 1 Bcf of volume per day. This brings the total growth organic growth potential of these pipelines to 67%. The locations connected by the major pipelines are also interesting, let’s take a closer look. The two largest pipelines are the NET Mexico Pipeline and the Eagle Ford Pipeline. Both of them deliver gas from the Eagle Ford Shale to Mexico. What is the significance of the Eagle Ford Shale? It is one of the most prolific unconventional plays in the U.S. Despite the recent commodity crash, we did not see a significant decline (see following chart from the EIA). Source: eia.gov As long as production does not stop, the company can keep its utilization rate up. To make things better, the pipeline is also under a 20 year ship-or-pay contract meaning that the company would receive payments even if production falls. To put the cherry on top, it is also the lowest-tariff transmission pipeline from Eagle Ford to Mexico. The Eagle Ford Pipeline is similar to the NET Mexico Pipeline. They both provide a cost advantageous way for production companies to transport gas to Mexico. Synergy? Although I feel that the pipelines are great and will deliver long-term cash flows to the company. I do not think that there is any synergy between this acquisition and any of the current renewal energy assets held. Now the management would have to deal with another source of risk (i.e. commodity risk). Despite the long term nature of the pipelines, ultimately their profitability will be dependent on the success of producers. No contract can protect the company if producers start to go bankrupt left and right. Although this is not an immediate concern (yet), it is still another drawback. Conclusion The assets acquired are excellent when you look them by themselves. They provide a source of long-term cash flow through decades long contracts and attractive locations. However, when you look at the entire company as a whole, there seems to be little benefit to the existing renewable portfolio. Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. (More…) I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article. Share this article with a colleague

Energy ETF PSCE Hits New All-Time Low

For investors looking for momentum, the PowerShares S&P SmallCap Energy Portfolio ETF (NASDAQ: PSCE ) is probably on their radar now. The fund just touched a new record low, and shares of PSCE are down roughly 61% from their 52-week high price of $49.57/share. But is more pain in store for this ETF? Let’s take a quick look at the fund and the near-term outlook on it to get a better idea on where it might be headed: PSCE in Focus PSCE focuses on the energy segment of the U.S. market, holding 33 stocks in its basket. It is a small cap-centric fund with key holdings in the energy equipment & services and exploration & production segments. The fund charges investors 29 basis points a year in fees, and has its top holdings in PDC Energy (NASDAQ: PDCE ), Exterran Holdings (NYSE: EXH ) and Carrizo Oil & Gas (NASDAQ: CRZO ) (see: all the Energy ETFs here ). Why the Move? The Energy sector has been an area to watch lately as oil price resumed its decline and got trapped in the nastiest downward spiral joining the broader sell-off in commodities amid growing global glut and the China slowdown. Additionally, the latest downbeat economic data from both the U.S. and China led to the concerns over tepid oil demand growth. More Pain Ahead? Currently, PSCE has a Zacks ETF Rank #4 (Sell), suggesting its continued underperformance in the coming months. Further, many of the segments that make up this ETF have the worst Zacks Industry Ranks. So there is still some downside risk signaling caution, and investors should wait until the sector bottoms out before jumping into this ETF. Original Post Share this article with a colleague

A Look At The Energy Sector Impact On Dividend ETFs

Summary While every index is slightly different, one theme that you often see repeated throughout the high dividend arena is an emphasis on big energy names. As a result of the energy sector woes over the last 12 months, I thought it prudent to look at the overall impact of these stocks on total return. One example of a fund with an outsized allocation to energy stocks is the iShares Core High Dividend ETF. One of the most popular strategies at our firm is the Strategic Income Portfolio, which focuses on a multi-asset approach to generate consistent income and overall low volatility. In order to accomplish those goals, we are continually scanning the ETF landscape to evaluate suitable equity income funds that meet our investment criteria. These ETFs typically consist of high-quality stocks with above-average dividend streams and low internal expenses. While every index is slightly different, one theme that you often see repeated throughout the high dividend arena is an emphasis on big energy names. Exxon Mobil (NYSE: XOM ) and/or Chevron Corp. (NYSE: CVX ) are commonly in the top 10 holdings of these diversified dividend portfolios. According to dividend.com, XOM has a current dividend yield of 3.74% while CVX yields 5.00%. As a result of the energy sector woes over the last 12 months, I thought it prudent to look at the overall impact of these stocks on total return. In addition, it should be noted that ETFs with a fundamental or dividend weighting methodology may be increasing their energy exposure in the future to adjust for the higher yields these companies are now paying. One example of a fund with an outsized allocation to energy stocks is the iShares Core High Dividend ETF (NYSEARCA: HDV ). This ETF is based on the Morningstar Dividend Yield Focus Index, which selects 75 stocks based on their high dividend yields and financial history. HDV currently has $4.3 billion in total assets, a 30-day SEC yield of 3.90%, and an expense ratio of 0.12%. The top holding in HDV is XOM, which makes up 8.3% of the total portfolio. Energy stocks as a whole are the second largest sector in HDV with a total weight of 18.45%. Obviously, this is going to result in these energy companies making a big impact on total return and overall yield. On a year-to-date basis, HDV is down 1.50% while the broad-based SPDR S&P 500 Trust ETF (NYSEARCA: SPY ) has gained 2.63%. This path of divergence really kicked into high gear over the last two months as the energy sector rolled over once again. While this overweight exposure has certainly been a drag on HDV, it hasn’t been a catastrophic event because of the counterbalancing effect of consumer staples and healthcare stocks. Other well-known dividend ETFs with a relatively healthy dose of energy exposure include: Vanguard High Dividend Yield ETF (NYSEARCA: VYM ) ~ 11.90% energy Schwab U.S. Dividend Equity ETF (NYSEARCA: SCHD ) ~ 11.40% energy WisdomTree Equity Income ETF (NYSEARCA: DHS ) ~ 13.55% energy First Trust Morningstar Dividend Leaders Index ETF (NYSEARCA: FDL ) ~ 10.62% energy Investors who believe the carnage in the oil & gas space is due for a bounce may be more inclined to choose a dividend ETF with a higher weighting in this sector. Conversely, those that are less enthusiastic about the prospects for an imminent recovery may choose to underweight or avoid these funds altogether. I continue to own VYM as a core equity income holding in my Strategic Income Portfolio. Despite its flat performance so far this year, the diversified basket of over 430 dividend-paying stocks offer attractive value characteristics and a dependable 30-day SEC yield of 3.26%. In addition, the ultra-low 0.10% expense ratio keeps the overall portfolio fees to a minimum. The Bottom Line One of the most important exercises that individual investors can do is analyze the index construction of their ETF holdings. Take note of any sectors that your funds are overweight or underweight in order to gauge how they will react under different circumstances. That way you are prepared in the event that a significant divergence occurs and can make adjustments as necessary. In addition, it’s important to reevaluate the portfolio on a quarterly or semi-annual basis. These funds undergo regular rebalancing and may shift their exposure based on the mandate of the index provider. Disclosure: I am/we are long VYM. (More…) I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article. Additional disclosure: David Fabian, FMD Capital Management, and/or clients may hold positions in the ETFs and mutual funds mentioned above. The commentary does not constitute individualized investment advice. The opinions offered herein are not personalized recommendations to buy, sell, or hold securities.