Recent Buy – Kinder Morgan Inc (KMI)

I initiated a new position in Kinder Morgan Inc. (KMI). Kinder Morgan Inc owns and operates energy transportation and storage assets in US and Canada. KMI is the fourth largest energy company in N.America, owning an extensive network of pipelines for natural gas, crude oil and petroleum products. The company owns an interest in or operates approximately 75,000 miles of pipelines and 180 terminals.
Corporate Profile (from FinViz):
Kinder Morgan, Inc. owns and operates energy transportation and storage assets in the United States and Canada. The company operates in six segments: Natural Gas Pipelines, Products PipelinesKMP, CO2KMP, TerminalsKMP, Kinder Morgan CanadaKMP, and Other. The Natural Gas Pipelines segment consists of approximately 62,000 miles of natural gas transmission pipelines and gathering lines, as well as natural gas storage, treating, and processing facilities. The Products PipelinesKMP segment consists of approximately 8,600 miles of refined petroleum products pipelines that deliver gasoline, diesel fuel, jet fuel, and natural gas liquids to various markets; and approximately 62 associated product terminals and petroleum pipeline transmix processing facilities. The CO2KMP segment produces, markets, and transports carbon dioxide to oil fields through approximately 1,500 miles of pipelines; owns interests in and operates seven oil fields in Texas; and owns and operates a 450-mile crude oil pipeline system in Texas. The TerminalsKMP segment owns and operates approximately 113 liquids and bulk terminal facilities; and approximately 35 transloading and materials handling facilities that transload, store, and deliver various bulk, petroleum, petrochemical, and other liquid products. The Kinder Morgan CanadaKMP segment transports crude oil and refined petroleum products through approximately 2,500 miles of pipelines from Alberta to marketing terminals and refineries in British Columbia in Canada, Washington state, and the Rocky mountains and central regions of the United States; and 5 associated product terminal facilities. The Other segment includes various physical natural gas contracts with power plants. The company was formerly known as Kinder Morgan Holdco LLC and changed its name to Kinder Morgan, Inc. in February 2011. Kinder Morgan, Inc. is headquartered in Houston, Texas.
Recent Buy Decision:
Kinder Morgan Inc has been on my radar for the past few months and I finally decided that it was a good time to initiate a position.
  • Kinder Morgan has had a bit of a see-saw year in 2013. The stock took a bit of a beating in December 2013 after this news release from the company – where the company stated that it was seeing some loss of income in its Kinder Morgan Energy Partners L.P (NYSE: KMP) and El Paso Pipeline Partners L.P. (NYSE: EPB) division. However, the business model is robust and KMI reported an expected dividend growth rate of 10% for 2014, right in line with their previous growth rate.
  • Recently it was announced that Kinder Morgan acquired an oil tanker business, American Petroleum Tankers and State Class Tankers for just under $1B (source).
  • I only own one pipeline stock in my portfolio – Inter Pipeline Ltd (TSE: IPL) and was debating whether to add another equity in this industry. In an endorsement for the future of the industry, Warren Buffett and Berkshire Hathaway announced that the big play for 2014 is Pipelines (source).
All the reasons above considered, I decided that KMI was a great stock and attractively valued at current levels and decided to initiate a position.
Pipeline stocks, Kinder Morgan Inc included, are sensitive to interest rate rises. Most investors tend to move their money into sectors such as REITs, pipelines and utilities in low-rate environment. When the interest rates rise, these sectors tend to suffer as the money finally leaves for the safety of bonds.
A summary of the stock:
  • Symbol: NYSE: KMI
  • Quote: $36.19
  • 52-week Range: $32.30 – $41.49
  • Debt/Equity: 2.71
  • Yield: 4.53%
  • 5-yr Dividend Growth Rate: 10%
What are your thoughts on KMI?My full list of holdings can be found here.

The Energy Sector

Energy companies in oil and natural gas sub-sectors provide investors with a great stream of passive income with healthy dividend payout and a fairly decent dividend growth rate. The energy sector is one of the top grossers of revenue across the world. In addition, the energy stocks are currently under-to-fairly valued, which makes them more attractive for value investors in current market conditions to initiate or extend their positions.
Warren Buffet, CEO of Berkshire Hathaway, has recently made big moves in the energy sector – with Suncor Energy (SU) and Exxon Mobil (XOM). Berkshire Hathaway took a $524M position in Suncor Energy (source) and a $3.7B position in Exxon Mobil (source).

My Portfolio

I recently closed my position in Husky Energy (HSE), which had not grown its dividends for years and I decided to write a covered call, which ended up in-the-money and being assigned. Read details about that transaction here. Due to this transaction, my asset allocation in the energy sector has dropped below what I consider ideal and I am now considering investing more in the energy sector by either adding more equity in my positions in Chevron (CVX) and Inter Pipeline Ltd (IPL) or invest in new equities.Stocks I am considering are:

Company Name Ticker Quote P/E Yield Payout
Chevron CVX $124.03 10.15 3.23% 32.7% 9.13%
ConocoPhillips COP $74.02 11.01 3.73% 41.1% 8.45%
Royal Dutch Shell RDS.B $71.40 9.45 5.04% 47.6% 3.29%
Suncor Energy SU $37.96 19.70 2.11% 41.4% 24.16%
Exxon Mobil XOM $95.01 12.42 2.65% 32.9% 10.04%
I am also considering pipelines/MLPs such as:
Company Name Ticker Quote P/E Yield Payout
Enbridge ENB $44.35 39.93 2.84% 168% 13.82%
Inter Pipeline Ltd IPL $25.80 5.00% 5.45%
Oneok Partners LP OKS $53.52 22.91 5.42% 122% 6.42%
Pembina Pipeline PPL $34.40 34.32 4.88% 173%
Kinder Morgan Inc KMI $35.52 36.14 4.62% 87%
TransCanada Corp TRP $47.12 20.85 3.90% 94% 5.09%
My portfolio weighting in IPL is quite high, so I do not intend to add more to IPL. I am debating between picking up more CVX shares or investing in a new equity. What are your thoughts on the equities mentioned here?Edit: I realized that I had excluded the oil refiners from my list of considerations, so adding them to the list here.

Company Name Ticker Quote P/E Yield Payout
Hess Corp HES $83.33 2.42 1.20% 1.6% 6.58%
Marathon Petroleum MPC $80.25 11.82 2.09% 21.5%
Phillips 66 PSX $68.48 11.93 2.28% 20.5%
Tesoro Corp TSO $57.42 18.76 1.74% 24.4% 14.87%
Valero Energy Corp VLO $44.11 10.05 2.04% 18.1% 8.32%
Disclosure: I own CVX and IPL.Image Credit: Habbick

Option Assignment – Husky Energy (HSE)

I wrote a Nov 16 $30.00 covered call option on Husky Energy Inc (HSE.TO) last month and collected a premium. This option expired in-the-money with Husky’s Friday closing price of $30.89 and was exercised closing my position in HSE.
The timing was interesting as Goldman Sachs changed their “sell” rating to “neutral” a couple of days after I wrote the options, raising the price target to $35.00. This caused the stock prices to rise (although they did fall back down a bit for a couple of weeks after that) and instead of buying back the call I had written, I let it expire as I had been thinking of selling this stock anyway.
I held HSE for approximately 3 years and generate a decent amount of passive income from it where my yield-on-cost was 4.20%. However, due to stagnant dividend growth, I wanted to sell the stock. Instead, I decided to try generating more income with the risk of being called to sell – which is what this turned out to be. I have no regrets on the option being called since I made a good profit on the investment and am leaving happy.

About Husky Energy (from Google Finance):

Husky Energy Inc. (Husky) is an international integrated energy company. Husky operates in three segments: Upstream, Midstream and Downstream. Upstream includes exploration for, development and production of crude oil, bitumen, natural gas and natural gas liquids. Midstream includes marketing of the Company’s and other producers’ crude oil, natural gas, natural gas liquids, sulphur and petroleum coke, pipeline transportation and processing of heavy crude oil and natural gas, storage of crude oil, diluents and natural gas and cogeneration of electrical and thermal energy. Downstream includes upgrading of heavy crude oil feedstock into synthetic crude oil, refining in Canada of crude oil and marketing of refined petroleum products, including gasoline, diesel, ethanol blended fuels, asphalt and ancillary products, and production of ethanol and refining in the United States of crude oil to produce and market gasoline, jet fuel and diesel fuels that meet United States clean fuels standards.

Recent Buy – Chevron (CVX)

I initiated a new position in Chevron (CVX). Chevron is a component of the Dow Jones Industrial Average (DJIA), an oil and gas giant operating in both Upstream and Downstream.The Upstream segment is involved in exploration, development and production of crude oil and natural gas; liquefaction, transportation and regasification associated with LNG; transportation of crude oil through pipelines; processing, transportation, storage and marketing of natural gas; as well as holds interest in a gas-to-liquid project. The Downstream segment engages in refining crude oil into petrochemicals, fuel and lubricant additives, as well as plastics for industrial uses. The company is also involved in coal and molybdenum mining operations; cash management and debt financing activities; insurance operations; real estate activities, energy services, alternative fuels and technology businesses. Chevron also manages interests in 11 power assets with a total operating capacity of approximately 2,220 megawatts.

Recent Buy Decision

Chevron is the fourth largest oil and gas company and has been a great all-round performer. Chevron has been increasing dividends for 26 years with a 5-yr dividend growth rate (DGR) of 9.2% and 10-yr DGR of 9.6%.

I think the stock is currently attractively valued with a P/E of 9.71. The stock has a 5-yr average yield of 3.30% and currently yields 3.37% with a payout ratio of 29.8% and plenty of room to increase dividends.

A summary of the stock:

  • Symbol: NYSE: CVX
  • Quote: $118.66
  • 52-week Range: $100.66 – $127.83
  • P/E: 9.71
  • P/B: 1.61
  • Yield: 3.37%
  • 5-yr DGR: 9.2%
  • Payout: 29.80%
  • Debt to Equity Ratio: 0.14
  • Book Value per Share: 72.27
  • Graham Number: 141.65
Disclaimer: The information provided here is for educational purposes only. All opinions here are my personal opinions and should not be taken as financial advice. I am not qualified to be a financial advisor. Always consult with your financial advisor before investing in any of the companies mentioned on this blog.

Dividend Comparison – Energy Sector

Energy (oil and natural gas) sector can be a very rewarding holding and should definitely be a part of every portfolio. Energy companies are some of the highest revenue companies in the world. A majority of them pay a healthy dividend and also manage to have a decent dividend growth rate (DGR). Following is a list of some of the largest energy companies with some of their key statistics as of Jul 2013.

Company Name Ticker Quote P/E Yield Payout Ratio 5-yr DGR
BP plc BP $40.78 5.84 5.14% 29% -6.39%
Chevron CVX $119.63 9.04 3.35% 27% 9.13%
ConocoPhillips COP $61.81 10.54 4.27% 43% 8.45%
Husky Energy HSE $27.62 13.86 4.34% 60% -1.74%
PetroChina PTR $112.55 11.9 4.02% 45% -3.91%
Royal Dutch Shell RDS.B $65.48 7.89 5.49% 30% 3.29%
StatOil ASA STO $20.33 6.56 5.7% 27% -7.19%
Suncor Energy SU $29.26 19.75 2.59% 34% 24.16%
Total SA TOT $47.88 9.86 6.33% 51% -0.7%
Exxon Mobil XOM $90.70 9.25 2.78% 23% 10.04%

My thoughts on Husky Energy

My portfolio holding of Husky Energy (HSE) has been paying dividends throughout my holding period (last couple of years), but I have not seen any increases in the dividend yield/payout. Moreover, the payout ratio is becoming dangerously high – currently at 60%. Oil and gas companies are capital intensive where they need to keep a lot of reserves for exploration, production, distribution etc. I am considering selling my position in HSE and picking up something else in the energy sector. I have CVX, COP and SU shortlisted. What do you think?

Disclosure: I own HSE.

Disclaimer: The information provided here is for educational purposes only. All opinions here are my personal opinions and should not be taken as financial advice. I am not qualified to be a financial advisor. Always consult with your financial advisor before investing in any of the companies mentioned on this blog.