Alternative Fuel Stocks for Your Portfolio

Alternative Fuel Stocks for Your Portfolio

This article is a continuation of my July postings related to rising energy production and prices, particularly on the domestic stage. You should take a look into these natural gas and propane companies given their upside/turnaround potential in the current environment of $100-plus oil, a strengthening economy, and plans for increasing energy production in the U.S.

I will provide an overview of each company along with investment recommendations. The industry offers intriguing dividend yields, along with relative safety.

Acquisition should shake things up
Laclede Group is likely to close on its purchase of Southern Union's MGE business on or after September 1. Laclede, based in St. Louis, will take Missouri Gas Energy under its wing for a price of about $975 million. It financed $428 million of this amount through the issuance of 10 million shares of common stock.

MGE will serve to expand its core gas utility business. The company derived 80% of its June-quarter revenues from that unit, with the remaining 20% attributable to its gas marketing operation.

Fortunately for Laclede, utility revenues have been climbing, while costs are falling somewhat. The company's overall results are a bit misleading, due to recent changes in the reporting of gas marketing. That said, the margins on natural gas are trending lower, and the outlook for the division is poor in the near term.

I believe the acquisition of MGE will alleviate much of this weakness and allow for a stabilization of results. On that note, given the shares' tumble of late, this may be a buying opportunity. Its forward P/E ratio is 15.7 (excluding acquisition impact). Importantly, the balance sheet is liquid, as seen by Laclede's healthy financial strength ratios, and the excess cash will likely be utilized for investments in operations or buyouts.

Natural gas business hitting stride
Atmos Energy achieved a 23% jump in natural gas distribution revenues in the June quarter. This increase spurred an earnings per share rise of 16%, to $0.36. It's on pace for an approximately 20% advance in share earnings for the full year, an exceptional rate for a utility on a historical basis.

The company's natural gas distribution segment, in fact, contributed 76% of its June-period revenue. The regulated transmission and storage division brought in another 23% of the total, while a nonregulated segment operation contributed the remaining 1%.

In addition to operating a growing core distribution unit, Atmos is investing in growth projects. Most significantly, its Atmos Pipeline-Texas operation, as part of its regulated business, transports natural gas to the Dallas region. Final phases of this project are likely to be completed by year-end, and the assets should earn a return on invested capital well above company norms. Its trailing 12-month return on investment was a healthy 4.8. I believe the Texas project will exceed this return, assisting the overall return on invested capital. One reason for this view is that, due to zero purchase costs, the gross margin in the Regulated segment is well above that of the Nonregulated segment. Essentially, the Texas business has a fixed operating margin of $26.7 million annually..

Thus, I believe the margin upturn that has stemmed from rate changes and that shift profits from the first half of the fiscal year (ends in September) to the second half, may well persist during 2014. Atmos shares, trading at a P/E of 15.5 and yielding 3.4%, are worth a look for total-return accounts.

Acquisition and generous dividend
Shifting gears just a bit, Suburban Propane is a company with the potential for rapid share-profit growth this year, as it should benefit from the August, 2012 buyout of Inergy Propane. The purchase doubled its customer base and expanded the company into eleven new states. As management further integrates the acquisition, earnings are apt to soar.

As of the June quarter, 79% of Suburban Propane's revenues were derived from the sale of propane, a substitute for natural gas and other fuels. Another 11% was derived from fuel oil and refined fuels, along with 5% from natural gas and electricity, and 5% from "all other" sources. The price per gallon of propane is close to that of natural gas. Distribution is by way of a 750 location networks existing mostly on the east and west coasts, with Inergy having provided a foothold in the Midwest.

Suburban will rely on the integration of Inergy for earnings improvements, at least for this year. It financed the purchase through common share and debt financing, reducing its current access to capital.

The shares, trading at 17.9 times forward earnings, offer a solid dividend yield of about 7.8%. With the benefits of the acquisition yet to be realized, they might well climb in price over the long term, after the buyout integration.

It is apparent that the management at these natural gas/propane companies views the market as favorable for growth. The combination of elevated oil prices and economic growth offers opportunities, and they are looking to capitalize through acquisitions, as well as organic projects. As energy suppliers, their stocks are relatively stable and offer above-average dividend yields. Accordingly, these companies all are worth considering at this juncture.

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Damon Churchwell has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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