Dear Subscriber,

Our Ultra Income Buy Unders and New Additions

We have three categories of Ultra Income Investments: Natural Gas/NGL infrastructure, MReit and MLP Preferred Stocks selling around 50% below book value, and Mortgage REITS selling at 50% ish below book value.

We then further segment these sectors by 1) Companies with reconfirmed dividends--no cuts 2) companies with confirmed >50% dividend cuts (which when the US economy gets going again to 90% of 2019, those dividends will be restored (because MLPs and REITS have to distribute 90% of their distributable cash flows monthly or quarterly).

Here are the recommended names for our Ultra Income Portfolio that we have vetted and have 100% reaffirmed their full 2019 dividend payments

Natural Gas Transportation Infrastructure
USA Compressor  USAC
Action to Take: Buy Under $12 with $22 target and 18% annual dividend

Our full report on USAC is on the web site, but here is the short version:
1) USAC provides a must-have service to natural gas operators and pipeline transport. 
Without compression, nat gas does not flow out of fracked wells and does not move down a pipeline-period.
2) USAC bills their clients one month in advance and with $3 billion billed since 2012 they were only stiffed for $1.2 billion when a producer declared bankruptcy (and even then the bank took over the wells and released the USAC compressors at a higher rate!). 
3) USAC contracts are "take or pay" meaning the leasee gets guaranteed compressor capacity whether they use it or not that month. There is NO commodity price risk for USAC.
4) USAC is buying compressors from MLPs that need the cash--at GREAT deals--and then lease them back!

5) USAC's core business model is more stable than that of a traditional pipeline and is less impacted by changes to production. The company is paid for horsepower usage which actually increases with lower pressure in a natural gas pipeline (given no change in volumes). As wells age and resources are consumed, pressure naturally declines which boosts USAC's demand/revenue.

Key point: With lower production of natural gas, volumes will be on the decline but horsepower demand declines much less. This largely unknown physical attribute has the effect of shielding USAC from substantial revenue declines given a substantial decline in drilling activity. It will also likely cause the company's revenue to rise in the future even without additional CapEx.

Put simply, USAC is unlikely to see declines worse than it did around 2016 which did not see significant cash-flow declines. USAC also trades around its book-value which is likely below its true net-asset-value and at a low forward "EV/EBITDA" of 6.7X. This is among the lowest valuation the company has ever traded at.

USA Compression Partners is my favorite nat gas MLP. With rising long-term demand and the production of natural gas due to the end of coal-based power production, the company's growth prospects remain strong. Capital expenditures among it and its competitors are in decline which should enable better rates in the future.

The impact of the virus will not be a substantial decline in earnings, but a temporary pause to growth. The dividend will not materially be impacted, particularly considering cost-cutting measures they have implemented. Given its 18% dividend yield and near record-low valuation, the risk/reward on USAC is STILL insanely favorable.

Key point: If you just reinvest the dividends you will double or triple the value of your positions over the next 5-6 years guaranteed! 

PS: I will NEVER EVER sell my USAC shares (and I will donate them to charity when I quit breathing for good). 

Nat gas producer Antero Resources (AR) 
Action to Take: Buy Under $4.50 with $20 target 2022
Nat gas midstream Antero Midstream (AM)  
Action to Take: Buy Under $6 with a $12 target and 28% annual dividend

We are highly optimistic about the future for natural gas in America and around the world due to its environmentally friendly profile vs. alternatives. Additionally, recent oil drilling/fracking rig shut-ins have curtailed the availability of associated natural gas which was the main cause of <$2 nat gas prices. Associated gas is the nat gas that is created when an oil well is fracked--and the nat gas that is not flared goes into a nat gas pipeline (and YES that is due to 1,0000 horsepower compressors!)

With up to 40% of oil fracking production offline, higher natural gas prices in the futures market tell me high nat gas prices are locked in. 

Antero Resources (AR) and Antero Midstream (AM) are two natural gas MLPs (now C-Corps) with a significant upside if natural gas prices remain constructive. Antero Resources is higher risk but 4X higher reward. AR is Antero Midstream's only customer and combined are the largest exporters and second-largest natural gas producers in the US. Both are highly leveraged, but, due to improving natural gas prices and $2 BILLION in nat gas hedges for 2020 and 2021, they have a significantly improved operating outlook that is NOT priced into either shares.

In the first quarter, Antero Resources repurchased 27 million of their own shares at $1.57 and spent $120 million repurchasing their own debt at a discount to par value.  In such a stressful market environment, the message is not ambiguous.

Antero Midstream has a $0.3075 quarterly dividend that was NOT cut, which implies $1.23 in annual distributions and a 27% yield, based on its $4.3/share closing price. AM has 1.1 distribution coverage and lower leverage than its comparables.

Antero Resources, in addition to $2 billion in nat gas hedges, also has another $billion hidden asset. AR will be selling a portion of its net well interest (NWI). AR has 84% in NWI. The Permian Basin NWI average is 75%. According to analyst Travis Koldus, CFA, AR can sell 1% of their NWI for $300-450mm and that they will close that transaction in the coming months.

Key Point: This contracted NWI sale will alleviate a bankruptcy risk that the market has feared. This transaction should change the risk perception associated with AM’s 28% yield and drive it toward 15%. We believe that AM’s yield will drop to 10% resulting in a triple in AM’s stock. AR could reach $20/share from $3.22/share.

So needless to say (but I will anyway): The appeal of a triple in AM with a 28% dividend and a six-fold move in AR is WAY better risk/reward today than buying Zoom (ZM) stock at 35X revenues, eh? 

Natural Gas midstream NGL Preferred C: NGL.PC  
Action to Take: HOLD--Buy Under $14 target and 18% annual dividend

NGL.PC preferred stock took off for us from our $8 entry and nearly doubled to $16 on the announcement that they were paying full dividends.

The following midstream companies (aka The 50% Dividend Cut Club) have temporarily cut their dividend (which gives us big upside and 2X current when it is restored)

DCP Midstream DCP-which announced a 50% cut of dividends which now is paying a 25% yield--and the stock was up on the news! 
Action to Take: Buy Under $12 target with $20 target and 14% annual dividend now but 50% higher in 2021

Enable Midstream Partners, LP (NYSE: ENBL) slashed its dividend by 50% to $0.16525/share but at $3.26 share price that 64 cent dividend (now covered by long term contract cash flow by 2X!)
Action to Take: Buy Under $4 target with $22 target and 20% annual dividend

AMZA - InfraCap MLP ETF--Buy Under $20 with 14% yield that has been cut 50%!

Preferred Stock ETFs
ALL preferred stock is issued at a $25 par value and the dividend yield is factored as a percent of that $25 par value. When times are back to normal, solid paying preferred paying coupon rates way above similarly rated bonds will sell at a premium to their $25 par value. THAT is why we also own preferred ETFs 50% below their $25 par value like PFFA PFFR and PFFL. 

PFFA Buy Under $18 with 17% Yield
PFFR HOLD --Yield from our <$15 Buy Under 14% 
PFFL Buy Under $17 with 15% Yield 
  
Actions to Take: BUY Mortgage Reits at Insane Valuations and Yields 18-30%

One of my investing heroes and mentors is billionaire distressed debt investor Howard Marks always says (as he did today in a note to his investors today)  "I always buy distressed debt and equities buy where there is unambiguous compelling value--why wait on a fat pitch down the middle?"

That's the opportunity we have in the mortgage REIT space right now (OK it was better this morning but we are not mREIT CEO mind readers and our PFFA PFFR units soared 20% and they have mREIT preferred in their portfolios). 

Like Mr. Marks says, with blown-up residential mortgage REIT equities and preferreds we have UNAMBIGOUS 50-100% upside valuations when we get to the "other side" aka the post-COVID 19 economy next year. Better yet, we are getting paid 20-40% to wait for a real vaccine for the COVID 19 virus. 

These mREITS and their preferred stocks are a fat pitch because:
1) The FED is buying mortgage-backed securities (MBS) at $80 billion a week with an unlimited capability to buy as much as they feel they need to ensure book values and liquidity 
2) We just got the book values from our mREIT research boutique provider and the panic selling took our favorites 50% or more below new book value (mREITS in a calm world sell at a slight premium to their book value because of their hedge ultra-high yields) and
2) The FHA came into the market and said they will become the servicer of record for the mREITS that own mortgage servicing rights (SRs) that they are still liable to pay bondholders if mortgages they are servicing are in temporary forbearance (PS--forbearance is not a forgiveness of payments--they get tacked onto the existing mortgage note or added to a mortgage note paid off at property sale) 

Buy 2X mREIT REML Under 3.25$ with $6 target  The easiest way to play the mREIT comeback is this ETN. 
BUY Annaly Mortgage (NLY) Under $6 with $9 target
Buy New Residential (NRZ) Under $7.50 with $12 target
BUY Two Harbors TWO Under $5 with $7.50 target
Buy NYMT under $3 target $5
NYMTO Preferred: Buy Under $17 Target $25
Chimera (CHMI) Buy Under $9 with $12 target

Repeat: the original research on all these names starts in late March posts on our website with "The Bottom is In!"

Toby