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Underfollowed High-Dividend Energy Preferred Stock Yields 9% With Bond-Like Risk

Summary

Blueknight Energy Partners is an unknown, underfollowed and small midstream company relative to its billion-dollar peers.

When it comes to the dividend and the overall financial health, size doesn't matter and this small midstream firm has a solid balance sheet.

For many reasons, the dividend on the Preferred stock is safe.

Actually, the Preferred stock carries a bond-like risk.

Although upside potential from the current price of $8.15 is rather limited in the short to medium-term, significant capital gains aren't out of the question in the long term for the Preferred Shares.

In May 2016, I recommended my income-seeking subscribers load Blueknight Energy Partners' (NASDAQ:BKEP) Preferred stock at $6.89. Based on the price of $6.89, the yield was as high as 10.4%. And more importantly, that was a secure dividend. And I want to emphasize on this, because my Premium Picks for my subscribers always combine the bond-like risk with the high yield.

This underfollowed Preferred stock that trades under the ticker BKEPP has risen 20% since I recommended it, and closed at $8.15 yesterday. Therefore, and aside the high yield, my subscribers also enjoy significant capital gains within less than two months.

The important going-forward questions are: Does the dividend remain safe? At the current price of $8.15, is there any upside left? If investors buy at the current price of $8.15, will they generate significant capital gains while also enjoying high yield with low risk? I will try to answer these questions in the next paragraphs.

Digging Into The Assets

Blueknight Energy Partners is a very small midstream company relative to its popular, billion-dollar peers. It is still unknown and underfollowed. It provides midstream services for the crude oil, residual fuel oil and asphalt cement industries.

Specifically, its strategic asset portfolio includes 15.9 million barrels of crude oil and petroleum product storage capacity, 976 miles of pipeline, approximately 170 crude oil transportation and oilfield services vehicles and 45 liquid asphalt cement terminals and storage facilities.

Its business is conducted in the United States, from coast to coast. And its operations include:

1) Crude oil transportation pipelines, gathering systems and a truck fleet to carry crude oil from producing fields to logistics hubs.

2) Liquid asphalt cement and residual fuel oil terminalling and storage facilities.

In February 2016, Blueknight expanded its existing asphalt terminal network by making two accretive acquisitions. It acquired two asphalt terminalling facilities from Axeon Specialty Products, located in Wilmington, N.C. and Dumfries, Va. Furthermore, it entered into a long-term storage, throughput and handling agreement with Axeon Marketing LLC. Axeon, or its predecessor, has been a customer of Blueknight since 2009 and currently leases other BKEP-owned facilities in the region. Axeon will continue supplying various products and services to its existing customer base out of the North Carolina and Virginia facilities.

The Wilmington, N.C., facility includes approximately 260,000 barrels of asphalt storage and 70,000 barrels of light fuel storage with water access. The Dumfries, Va., facility includes approximately 87,000 barrels of asphalt storage and 468,000 barrels of light fuel storage with water access along with connections to Plantation Pipeline.

The transaction was financed by borrowings under the company's existing credit facility and brought Blueknight's existing asphalt and residual oil storage network to a total of 45 terminals located in 23 states.

Digging Into The Preferred Stock

According to Preferred Stock Channel, Blueknight's Preferred stock is a par $6.50 cumulative preferred convertible partnership unit with an 11% coupon. Its par value is approximately $196 million based on 30.16 million outstanding preferred units.

As expected, the preferred holders are senior to the common equity holders, as quoted below:

"The Preferred Units rank prior to our common units as to both distributions of available cash and distributions upon liquidation. Holders of our Preferred Units are entitled to quarterly distributions of $0.17875 per unit per quarter (or $0.7150 per unit on an annual basis). If we fail to pay in full any distribution on our Preferred Units, the amount of such unpaid distribution will accrue and accumulate from the last day of the quarter for which such distribution is due until paid in full".

A majority of BKEPP is owned by the general partners (Vitol and Charlesbank). Specifically, Vitol and Charlesbank owned 18.3 million preferred units (~60% of the total outstanding preferred units) as of March 2015.

Moreover, it's worth noting that privately-held Vitol is the...


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