Credit: Shutterstock photoCutting-edge and high-yield are not two terms that are heard together often. Cutting-edge conjures up thoughts of growth focused internet or high-tech firms creating novel products and services. High-yield, however, makes one think of stodgy, slow-growing REITs or blue-chip stocks producing a high dividend yield but not much upside.
Despite the seemingly contradictory terms, I have discovered a company that not only yields an ultra-high dividend but operates in a little-known, cutting-edge sub-sector.
The sub-sector I am referencing is liquefied natural gas, or LNG for short.
The United States is awash with natural gas. The drilling process known as fracking has opened vast reserves of the energy source in recent years. While natural gas is leading the way toward American energy independence, it is very expensive to transport due to its gaseous nature. LNG attempts to solve this issue by turning the gas into a liquid for more cost-efficient transport.
Natural gas is very inexpensive to produce, but it simply takes up too much space to carry in its gaseous form, requiring expensive pipelines. But when natural gas is liquefied into LNG by cryogenic freezing to minus 260 degrees Fahrenheit, it takes up an astounding 600 times less volume than in its gaseous form. This permits the transportation and storage of LNG in a specially designed, insulated containers and transport ships.
What is most exciting about the use of LNG is that the United States has the reserves to become its third largest exporter after Qatar and Australia.
Although LNG has been a popular source of energy since the 1950s, it has just been since January that the United States has been able to export it -- and it has already shown to be a hugely popular export. As of January 2016, U.S. companies have sold approximately 58 million tons of LNG under long-term contracts from five terminals. According to the Council of Foreign Relations, experts believe that the terminals will be able to adequately supply the entire LNG markets of Europe and South America.
Despite the positive changes, the U.S. LNG market remains in its infancy. Global LNG trade inched higher by 2.5% in 2015, with 72% of demand coming from Asian nations. Currently, 41% of global supply hails from the Asia-Pacific region, and the Middle East provides another 40%.
One problem preventing the export of American LNG to Asian countries is the lack of capable ports on the West coast -- but a solution may be at hand. Bloomberg reports that in July 2016, Maran Gas Apollonia became the first LNG carrier ship to pass through the just-improved Panama Canal. The ship was loaded with LNG and traveling to countries in Asia according to the ship's owner, Maran Gas Maritime Inc.
Most bullishly, the U.S. Energy Information Administration forecasts that the United States may dispatch as many as 550 tankers a year through the Panama Canal by 2021.
The high-yielding, yet high-tech company I am referencing in this sector is the LNG shipping company, Dynagas LNG Partners (NYSE: DLNG ) .
The Monaco-based company is a growth-oriented limited partnership focused on owning and operating high specification and versatile LNG carriers that are employed on multi-year contracts with international energy companies. Long-term contracts offer the benefit of stable cash flows and high utilization rates.
Dynagas's current LNG carrier fleet is optimized for trading flexibility. In addition to conventional trade, a portion of the company's LNG carrier fleet is assigned with Ice Class 1A FS notation, enabling trade in subzero and ice-bound conditions.
In addition to the current LNG carrier fleet owned by DLNG, the company holds purchase options on five more LNG carriers from partner Dynagas Holding Ltd. Two of these LNG Carriers are already employed on charters with an initial term of five years.
On November 14 the company posted record results for the third quarter, with a 22% increase in adjusted earnings year-over-year and their fleet of six ships at 100% utilization.
What has me most bullish for Dynagas is their focus on the future, showing a true long-term perspective. When third quarter results were announced, CEO Tony Lauritzen issued a statement highlighting the company's long-term contracts, and the subsequent increase in contract backlog. These developments show that Dynagas will see steady business well into the future.
Risks To Consider: Fracking has flooded the market with natural gas, bringing prices to a 17-year low. Once U.S. exports kick into gear, there is a very real potential of an oversupply-driven upset in theglobal market While the company's long-term contracts can help smooth out the supply/demand price pressure, the macroeconomic picture remains uncertain.
Action To Take: The nearly 11% annual dividend yield combined with the growing LNG market makes DLNG a compelling buy target. Go long on a break of $15.65 per share with an initial stop loss at $13.92 per share. My target price is $20.00 per share.
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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
