Recently I went looking for the best candidates for both growth and income in the energy industry for 2014.
I used the proprietary stock screener I developed for my research service Peak Energy Strategist. I call the screener the Peak Energy Indicator, or PEI.
I used the PEI to scour the 114 energy master limited partnerships (MLP) available to investors. It identified just three.
[ad#Google Adsense 336×280-IA]Each of them pays a dividend greater than 10% annually and has excellent potential for growth as well.
Today I wanted to tell you about one of them.
(The other two are in my Peak Energy Strategist portfolio.)
CVR Refining L.P. (NYSE: CVRR) is a downstream energy company.
It turns crude oil into gasoline, distillates, sulfur, asphalt and other products at two refineries in Oklahoma.
Its Coffeyville, Kansas, refinery has a crude oil throughput of 115,000 barrels per day (b/d) of crude. Its Wynnewood refinery has a throughput rate of 70,000 b/d.
The refineries’ location makes it possible for CVR to use as much as 80% West Texas Intermediate crude oil as feedstock. This is important, as it provides a huge price advantage over other refineries that must use higher-priced Brent crude.
CVR Refining has one of the lowest operating expenses in the industry.
CVR’s crude feedstock comes from the Permian Basin in West Texas, the Williston Basin in North Dakota and the Denver-Julesburg Basin in Colorado. Its finished products are marketed throughout the Midwest.
The company has another big advantage over many of its competitors: It owns 350 miles of gathering pipelines. It also has 6 million barrels of total storage capacity at its refineries.
At this writing, CVR Refining’s dividend yield is a mouth-watering 14.5%.
The only catch is its yield can vary from quarter to quarter. Its debt service is a priority, and is paid before distributions.
Like most refineries, CVR’s earnings – and therefore its cash available for distribution – depend on the gross margins of the refinery during that particular quarter.
For 2014, the company has an average of 4.1 million barrels of crude hedged at attractive crack spreads. Crack spread is the difference between the price of a barrel of crude and the finished products that come from it.
The lower the crude price and the higher the finished price, the greater the crack spread. Crack spread has a direct correlation to company profits.
Hedging crude prices provides protection to both earnings and dividends in a big-downside scenario. CVR Refining also hedges some of its refined gasoline to further protect its earnings capacity.
The bottom line is this: CVR Refining’s prospects for both growth and income in 2014 are excellent. I believe its hefty dividend is safe from cuts due to CVR Refining’s aggressive hedging strategy and its feedstock price advantage.
If you’re looking for a beefy dividend and the prospect of growth, consider adding a few shares of this specialty refiner to your energy income portfolio.
Good investing,
Dave Fessler
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Source: Investment U