This stock has a well-covered 13%-plus dividend yield, based on long-term, fee-based contracts.
It reported record revenues, EBITDA and Distributable Cash Flow for the third quarter.
It just raised its guidance again this quarter for the second time in a row.
Looking for a gift from the market? Here’s a stock that might fit the bill. We’ve written about USA Compression Partners LP (NYSE:USAC) before, due to its compelling business model, its strong growth, and, of course, its attractive dividend yield.
Guess what? Mr. Market just doesn’t care — he thinks that this is just another problematic Energy stock, and has shown USAC no love at all:
To be fair, part of the recent price fall was related to USAC’s 4 million share offering, which it announced on 9/9/15, after which its price/share dropped from $19.60 down to $17.24 the next day, and continued to drift down to a low of $13.05 amidst the September market chaos. It recovered back up to $17.68 before drifting down to its current $15.73:
You can find a lot more detail on USAC’s business and industry dynamics in our previous articles. This article’s intent is to update that information.
Profile: USAC provides compression services to producers, processors, gatherers and transporters of natural gas.
It operates under long-term contracts with large, long-time customers and focuses primarily on large‑horsepower infrastructure applications.
It operates primarily in shale plays, including the Fayetteville, Marcellus, Woodford, Barnett, Eagle Ford and Haynesville shales. USAC was founded in 1998, and went public in January 2013. The company was founded in 1998 and is headquartered in Austin, Texas.
(Source: USAC website)
Distributions: Thanks to the market’s indifference, you now have a chance to pick up a solid dividend paying stock that is yielding over 13%.
You can track USAC’s distributions and current yield in our High Dividend Stocks By Sectors Tables (in the Energy section).
Prior to Q3 2015, USAC raised its quarterly distribution 9 consecutive times, from $.435, to the current $.525. Management decided to be more conservative this time around and maintained the Q3 payout at $.525.
(Source: USAC website)
USAC has shown steady improvement in its Distribution Coverage over the past 4 quarters, going from 1.11x in Q4 2014 to 1.25x in Q3 2015:
Options: As it happens, there are shorter-term alternatives available for investing in USAC — namely selling options. If you want to increase your income on this stock, this March $17.50 call strike pays $.60, which would effectively more than double your dividend.
Our Covered Calls Table will give you more details for this trade and over 25 others.
The $17.50 strike is $1.77 above USAC’s price/share, so you’d also have the potential for some price gains. Here are the nominal yields for the 3 main income scenarios for this trade:
Selling Cash Secured Puts is yet another short-term way to gain income from a stock. This March $15.00 put strike is below USAC’s price/share and pays $1.05, 2 times the amount of USAC’s quarterly distribution. Your breakeven would be $13.95, which is around 5% above USAC’s 52-week low.
Our Cash Secured Puts Table lists more info for this and over 25 other put-selling trades:
Earnings: The company has had strong growth in revenue, adjusted EBITDA, and Distributable Cash Flow over the past 4 quarters. Its DCF growth is over 51% and EBITDA grew over 39%.
USAC has grown its fleet by 16% over the past year. It front-loaded its CapEx in 2016 and has spent over 90% of its budget in the first 3 quarters.
On the Q3 earnings call, CEO Long said:
“we expect our new unit CapEx for 2016 to be significantly lower than in 2014 or 2015. We expect to see a trend of fewer, but larger projects in these areas as evidenced by our increased new unit size in the most recent quarter.”
(Source: USAC website)
Quarterly $ Figures: In Q3 2015, USAC had record revenues, Adjusted EBITDA, and Adjusted Distributable Cash Flow.
Increased Guidance: For the second quarter in a row, USAC’s management upped its 2015 guidance. As we pointed out in our previous article, you’re not likely to find many Energy-related companies increasing guidance these days, but USAC keeps doing it.
Analysts Estimates: USAC has beaten EPS estimates for the last 4 straight quarters, and has also received upward estimate revisions over the past 7- and 30-day periods.
There are only 6 analysts covering USAC currently, so there’s quite a wide array of price targets. According to these targets, USAC looks to have good upside potential, ranging from 8% below the lowest price target to over 35% below the mean target, all the way to 71% below the top target:
Valuations: We’ve updated this valuation table to include 2 other compression services stocks we’ve written about recently — Arch Rock Partners LP, (NASDAQ:APLP), (formerly EXLP), and Energy Transfer Partners, (NYSE:ETP).
ETP is a much bigger, more complex company, but it is active in the compression business. APLP recently was involved in a spin-off from its parent company, Arch Rock Inc. (AROC), formerly known as Exterran Holdings.
All 3 of these stocks have high dividend yields and low Price/Distributable Cash Flow valuations due to their beaten-down share prices.
Financials: A mixed bag here — USAC’s ROE and ROA could use some improvement, but it carries less debt than these competitors.
USAC’S Debt/Adjusted EBITDA Leverage Ratio decreased to 4.51x from 4.9x in the third quarter, as it used the proceeds from its September share offering to pay down debt.
On the Q3 earnings call, CEO Long presented an interesting history of MLPs, explaining that there are basically 2 types:
1. “The first wave, (of around 15), MLPs shared a few things in common. Demand driven, critical infrastructure, generally strong counterparties, fee-based income streams and stable cash flows. MLPs were designed to generate cash flows for the long term, and this group of MLPs generally fit this description. This is the bond like, defensive aspect of MLPs.”
2. “We now have over 125 MLPs — emergence of new MLP classes of assets that have a very different asset and/or business profile, including; roughly 50 companies involved in the E&P business that have attendant commodity and geologic risks with depleting assets, oil field service providers, whose business is tied directly to volatile drilling and commodity price-driven cycles; coal, chemical, shipping, even other, mostly commodity and cyclically driven businesses that are radically different than those originally contemplated by the traditional MLPs”.
“USAC has frequently been lumped into the (2nd) category. However, there are multiple reasons, which have been apparent to us for over 17 years, why we believe USA Compression should belong in the same category with those original traditional-type MLPs. Firstly, without compression most gas in the US won’t get to the marketplace.“
“Virtually all of the increase in natural gas supply will need compression to get into and through the pipeline infrastructure and move to the marketplace.”
Here’s another interesting point he made — compression companies are much more likely to get paid if a customer goes bankrupt —
“Without compression there are no cash flows for our customers to service debt and pay bills. While the majority of our customers are strong credit counterparties, it is important to remember that in bankruptcy proceedings compression providers like us tend to get paid.”
USAC has kept a tight lid on bad debt. “… for the past 10-year period, which includes the 2008-2009 financial crisis, USA had a mere $800,000 of bad or uncollectible debt write-offs on revenues of $1.2 billion or said another way, only 0.007%.”
USAC’s contracts are also structured so that there are substantial costs to returning or switching out equipment:
“the customer bears the cost of freight and cranes required to return the equipment, and additionally many of our units especially in the Northeast are installed inside buildings that would require disassembly.”
All tables furnished by DoubleDividendStocks.com, unless otherwise noted.
Disclaimer: This article was written for informational purposes only.