USA Compression Partners LP: Unique Energy Play Offering an 11.2% Dividend Yield
1 High-Yield Stock to Consider
Regular readers of this column would know that I’m a big fan of master limited partnerships (MLPs). MLPs often own infrastructure assets such as pipelines, earning a steady stream of income by operating “energy toll roads.”
Most recently though, the MLP sector has been hit with some serious bad news. Last month, the Federal Energy Regulatory Commission (FERC) announced that it would no longer allow MLP interstate natural gas and oil pipelines to recover an income tax allowance in cost of service rates. (Source: “FERC Revises Policies, Will Disallow Income Tax Allowance Cost Recovery in MLP Pipeline Rates,” Federal Energy Regulatory Commission, March 15, 2018.)
Investors did not like the news; the Alerian MLP Index tumbled almost five percent in the trading session following FERC’s announcement.
Still, that doesn’t mean investors should ditch the sector completely. For instance, Usa Compression Partners LP (NYSE:USAC) looks like a great income play.
As the company’s name suggests, USA Compression Partners provides an essential service to the natural gas industry—compression. Compression is needed in order to move natural gas into pipelines and processing infrastructure. With nearly 1.8 million total compression unit horsepower, USA Compression Partners is one of the largest independent providers of compression services in the country.
The first thing to note here is that, despite being a midstream MLP, USA Compression Partners is not affected by the recent regulatory change.
In a press release responding to the FERC announcement, the partnership said it “does not currently provide services pursuant to FERC jurisdictional cost of service-based rates or own any interstate pipelines…” As a result, USA Compression Partners “does not expect to be adversely impacted by the announcement from the FERC.” (Source: “USA Compression Responds to FERC Announcement,” USA Compression Partners LP, March 19, 2018.)
Moreover, even though natural gas compression doesn’t look like the typical “energy toll road” business, USA Compression Partners is stable enough to generate recurring cash flows.
As one of the biggest compression service providers in the United States, USAC has a broad customer base that includes producers, processors, gatherers, and transporters of natural gas and crude oil. The partnership’s horsepower utilization average has stayed above 93% for more than a decade. (Source: “USA Compression Partners, LP Wells Fargo Securities Pipeline, MLP and Utility Symposium December 6 – 7, 2017,” USA Compression Partners LP, last accessed April 17, 2018.)
By conducting business mostly through fixed-fee contracts, the partnership has prospered through multiple commodity cycles. While USAC is a relatively new name for stock market investors (it completed its initial public offering (IPO) in January 2013), it has been providing compression services for nearly two decades.
Just take a look at USA Compression Partners’ distribution history and you’ll see why it’s special.
When USAC went public in 2013, its first quarterly distribution was $0.348 per unit. Since then, the payout has only been increasing. With its quarterly distribution rate standing at $0.525 per unit today, USAC’s payout has grown by more than 50% in less than five years. That’s quite an achievement, given the downturn in oil and gas prices during this period. (Source: “Distributions & Splits,” USA Compression Partners LP, last accessed April 17, 2018.)
And because the partnership comes from the beaten-down MLP sector, its unit price didn’t shoot through the roof, meaning it can still offer a pretty substantial yield.
Trading at around $18.70 apiece, USA Compression Partners LP has an annual yield of 11.2%.
For investors who want to use high-yield stocks to boost the return of their income portfolios, USAC stock deserves a serious look.