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Get a Piece of the Private Equity Action in the Energy Sector
By Michael Brush
Exclusively for InvestorIdeas.com
May 25, 2007
Now that oil and natural gas are a lot more expensive than they were a few years ago, energy companies are circling back to develop fields abandoned as unprofitable way back when.
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Much of this work is done by smaller, private companies – since these projects are often too small to move the needle at big, publicly-traded energy companies. So it’s hard for an average Joe like me to get exposure to this trend.
However, insiders alerted us to a way to solve this problem recently when they made big purchases in NGP Capital Resources (NGPC) -- a micro-cap company that offers financing to small and developing private businesses in the energy sector.
NGP Capital Resources now has 17 companies in its portfolio, and recent results are impressive. The company has realized a 20% return on five completed investments since November 2004, before fees and expenses.
Earnings per share were up over four fold in the first quarter compared to a year before – at 47 cents. Net investment income grew 46% to $4.4 million in the first quarter, and it grew 58% last year to $16.5 million. The weighted-average yield on its investment portfolio was 12.5% in the first quarter.
“Overall, we believe our portfolio is building momentum for continued earnings and dividend growth,” the company said in a recent filing. Recent insider buying seems to bear this out. Since May 15 insiders have purchased over $1 million worth of stock for prices between $16.70 and $17, or right around current levels, according to InsiderScore.com.
High finance to small companies
NGP Capital Resources offers secured loans in exchange for interest, of course, but also sweeteners like royalty income, warrants and equity kickers. It typically invests in upstream and midstream exploration and production companies in oil and gas. It may also invest in coal, power, electricity, energy services and alternative energy. Investments are generally in the $10 million to $50 million range.
Besides the normal factors like good management and decent prospects, NGP Capital likes to see some sort of exit strategy on the horizon when it invests. This could be prospective cash flow or asset development that will allow companies to refinance, or potential asset sales. NGP Capital says its own managers have enough experience in the field to have greater access to investment opportunities than competitors.
Some recent deals
In the first quarter, NGP Capital looked at 54 potential deals and added two companies to its portfolio. One, Alden Resources, got a $36.5 million loan to help it acquire coal properties and a processing plant. Another, Tammany Oil & Gas, got a $60 million loan to buy and develop oil and gas properties off of Louisiana and Texas. In April, NGP Capital participated in an energy development finance deal with Anadarko Petroleum (APC).
Nice tax structure
NGP Capital is a “regulated investment company” which means it has to distribute virtually all of its taxable income to avoid an excise tax. This is good for investors because earnings on NGP Capital investments don’t get taxed twice – they only get taxed when they are paid out as dividends.
Plus it’s not a master limited partnership even though it sort of acts like one – so there are no messy complications at tax time like the need to recognize unrelated business taxable income. At recent stock prices, NGP Capital pays an annual dividend yield of about 6%.
The bottom line: Energy companies are starting to look a little pricey compared to the price of oil and natural gas. So I’m a little nervous about adding new positions in the sector. But the insider buying is quite compelling in NGP Capital and there is a decent dividend cushion, so I’d buy right here.
Disclaimer
At the time of publication, Michael Brush owned shares of NPG Capital Resources. Mr. Brush is an independent columnist for this web site.
For more on Insiders Corner disclosure, see the disclosure section in About Insiders Corner:
http://www.investorideas.com/insiderscorner/. InvestorIdeas.com Disclaimer: www.InvestorIdeas.com/About/Disclaimer.asp. InvestorIdeas is not affiliated or compensated by the companies mentioned in this article.
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