BKEP Stock: This May Be the Best Energy Play, and It Yields 10.4%
August 24, 2017
Earn a Double-Digit Yield from This Top Dividend Stock
Wall Street rarely mentions its name, but this high-dividend stock may be the best energy play for income investors.
You see, news headlines in the energy sector haven’t been that cheerful in recent years. With the downturn in oil and gas prices, many energy companies—including several blue-chip names—have experienced sizable declines in their financials. And some have cut their workforce as well as their dividends.
One of the things that could help many energy companies climb out of the doldrums is higher commodity prices. However, with West Texas Intermediate (WTI) crude currently trading at $47.83 a barrel, oil prices still have a long way to go to full recovery. And remember this: it takes a 50% drop from an asset’s price to plunge from $100.00 to $50.00, but for it to climb from $50.00 to $100.00 again, it would need a 100% increase.
And that’s what makes this high-dividend stock special. The company isn’t as exposed to commodity prices as most energy companies. Moreover, it does not need surging oil prices to support its generous payout. In fact, even in current market conditions, its business is still generating more than enough cash to cover its double-digit dividend yield.
I’m looking at Blueknight Energy Partners L.P. (NASDAQ:BKEP), a master limited partnership headquartered in Oklahoma City.
The reason why Blueknight doesn’t have that much exposure to commodity prices is that the partnership is not in the exploration and production business. Instead, it provides asphalt terminaling, storage, and processing services, as well as crude oil terminaling, storage, and transportation services.
Right now, the partnership’s midstream asset portfolio consists of 16.6-million barrels of storage capacity, 670 miles of pipeline, and about 200 crude oil transportation and field services vehicles.
A High-Dividend Stock Backed by a Stable Business Model
Bluenight Energy Partners is a very generous dividend payer. With a quarterly distribution rate of $0.145 per common unit, BKEP stock has an annual yield of 10.4%.
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Of course, in today’s market, a high dividend yield could be a sign of trouble, especially in the energy sector. But Blueknight has something that very few energy companies have managed to achieve: a stable business model.
You see, even in the midstream business, many companies are subject to volume risk. If customers don’t have energy products to move and store, the demand for their midstream services would decline. Blueknight, however, manages to hedge the volume risk through highly contracted operations.
Product terminaling is the biggest business of Blueknight, contributing 92.6% of the partnership’s operating margin last year. The business is conducted through two segments, asphalt terminaling services and crude oil terminaling and storage services.
In particular, 83.4% of the partnership’s asphalt terminaling segment’s operating margin comes from take-or-pay contracts with a fixed fee. This means customers are paying a base fee to Blueknight every month whether or not they use its terminaling service. And if their usage exceeds the minimum take-or-pay volumes specified under the contracts, they will pay more.
The contracts in Blueknight’s asphalt terminaling services segment usually range from five to 10 years. This adds stability to the partnership’s cash flow.
In the second quarter of 2017, the partnership generated $12.7 million in distributable cash flow, achieving a distribution coverage ratio of 1.03 times. This means the partnership was paying out less than what it earned. (Source: “Blueknight Announces Second Quarter 2017 Results,” Blueknight Energy Partners L.P., August 1, 2017.)
With a double-digit yield and a stable business, Blueknight Energy Partners is a top dividend stock for income investors interested in the energy sector.
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