Oil companies are often characterized by high capital involvement and as such, are not considered great dividend paymasters. While this assessment is largely true, there are some exceptions. Calumet Specialty Products Partners, L.P (NASDAQ:CLMT), Ferrellgas Partners, L.P. (NYSE:FGP), and NGL Energy Partners LP (NYSE:NGL) fall in the latter category with dividend yields in excess of 6.5%. There is more to these stocks than just great dividends.
Calumet Specialty Products Partners, L.P (NASDAQ:CLMT) is a North American producer of specialty hydrocarbon products. Apart from refined petroleum products such as gasoline, diesel, jet fuel, and heavy fuel oils, its products include customized lubricating oils, white mineral oils, solvents, and waxes. The stock has moved north 26% in the last quarter or so but still offer a dividend yield close to 7% at current market rates. Due to the company’s exposure to high margin specialty products, the company witnessed a steady net profit margin of 4.4% throughout 2012. This level of profit margin is reserved for big oil refiners. Another positive factor for the company has been a recent ground breaking of its Dakota Prairie refinery in North Dakota to benefit from the burgeoning Bakken Shale. Although it will take about 20 months to complete, investors are buoyed by the prospects.
NGL Energy Partners LP (NYSE:NGL) operates a vertically integrated propane marketing and distribution business. The stock has moved up more than 10% over the month but still offers a dividend yield of 6.8%. Other valuation metrics also indicate the company is worth a closer look. Falling propane prices last year forced the company to look at alternatives. The company undertook four acquisitions in nine months ended 31 December by paying $53.3 million in cash and assuming $1.3 million in long-term debt. Prominent among these buyouts is High Sierra in June 2012 which has catapulted the company’s finances to a new height. As a result, NGL Energy’s nine month revenues grew to $2.8 billion from $871 million in the same period last year. At current prices, the stock is valued at 56 times of its earnings in previous four quarters; however, it reduces to a multiple of just 14.8 on a forward basis, underlining the impact of the High Sierra acquisition.
Dividend champion or a value trap?
Kansas based gas distributor Ferrellgas Partners, L.P. (NYSE:FGP) is another player with an exceptional dividend yield of 10.8%. The yield has gone up recently as the stock has corrected from $21 in the starting of the month to $18.5 now. Probably the only question mark over this stock (and that’s a big one) is the mounting pile of debt. At the end of January, this debt pile stood at $1.08 billion while shareholders equity remained in red. Recent quarterly performance has not really been encouraging with the company reporting lower revenues. To battle with lower propane prices, the company seems to be focusing on acquiring small companies to support profits. This is a materially different strategy than the one used by NGL Energy. Earlier this week, the company said it is buying New York based barbeque accessories company Mr. Bar-B-Q. While financial terms of the deal were not disclosed, it is said to be accretive with immediate effect. This strategy may work in the short term, but the company runs the risk of being saddled with businesses unrelated to its core operations in the long term.
In conclusion, income investors may want to take a closer look at core operations of Calumet Specialty Products Partners, L.P (NASDAQ:CLMT) and NGL Energy Partners LP (NYSE:NGL) to benefit from not just dividends but capital gains too. Ferrellgas Partners, L.P. (NYSE:FGP) remains a black horse which cannot be ruled out, but it requires extra scrutiny for the cautious investor.