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Martin Tillier

Martin Tillier

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The Illusion Of High Yields

Several times in the last few months I have suggested that investors look to accumulate energy stocks for the long term right now, based on the belief that the mid-$40s lows for WTI would hold. There are two provisos that must go with that suggestion. First, you must be prepared to cut any position, probably for a loss, should oil break below $40. Second, not every energy company is a bargain at current levels. The second proviso is particularly important for those seeking income from their investments.

In an environment where a 10 Year U.S. Treasury yields around 2 percent, and that is positively extravagant compared to Bund yields, it is understandable that published yields in the teens for oil and gas Exploration and Production (E&P) are attractive to income seekers. Of course, as some of you may realize, the yields published on Yahoo Finance or wherever you may look bear little or no relation to the current reality. They are based on distributions from the last twelve months, during six of which WTI crude was fetching over $100/Barrel, but the current price, however, reflects expected distributions in the next twelve months.

Thus, when you see a yield of 16.23 percent for Breitburn Energy Partners (BBEP), for example, or 17.31 percent for Atlas Resources LP (ARP), it is not realistic to expect that in the near future. The price of both of those stocks has more than halved in the last six months as the market anticipates significantly lower distributions.

That…

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