Why These 3 High-Yield Energy Stocks May Become Some of the Best-Performing Stocks of 2015

By Markets Fool.com

In the last three months, oil prices have crashed 41% to the lowest levels since the financial crisis. Among the worst victims of the carnage have been oil and gas service companies such as frack sand suppliers U.S. Silica Holdings , Hi-Crush Partners , and Emerge Energy Services .

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There are two reasons in particular why I feel this recent sell off is overblown and at today's prices these three investments may prove among the most profitable long-term investments you can make in 2015.

Long-term contracts secure profits and dividends for years to come
Wall Street's brutal sell-off in frack sand suppliers might suggest America's shale oil and gas revolution is over and these companies' and MLPs' earnings, cash flows, and dividends are about to fall off a cliff.

However, these fracksand suppliers have all secured lucrative contracts for the vast majority of their production, including output from sand mines that have yet to open.In fact, U.S. Silica has secured high-margin contracts for 70% of its production through mid-2018.

Similarly, Hi-Crush has signed 11 new long-term contracts this year and has 88% of its 2015 capacity contracted for, much of it under super-safe "take or pay" contracts with an average life of 4.2 years. This means that even if customers decide not to accept delivery of Hi-Crush's sand, the MLP still gets paid as if they had.

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Meanwhile, Emerge Energy Services has 87% of production, including expansion projects under way, contracted for an average of 4.2 years. As seen at Hi-Crush Partners, these contracts are very favorable to the MLP, as they lock in fixed volumes of shipments and prices, thus ensuring growing cash flow and profit.

While there is always a risk that oil companies may be forced to break these contracts, as Baker Hughes did with a Hi-Crush contract in 2012,such events are relatively rare and usually results in substantial contract cancellation fees that would help offset the financial pain such an event would cause.

In the meantime, present and prospective investors can feel secure that the current generous payouts from these frack sand suppliers are unlikely to be cut anytime soon. That's because, as this table indicates, each of these corporations (U.S. Silica) or master limited partnerships (HI-Crush and Emerge) have sufficient cash flow to pay their dividend or distributions under their current production volume. With production set to increase in the years ahead, and the vast majority of that output secure under lucrative contracts, these payouts should be sustained, or even grow,in the years to come.

Company/MLP Yield Payout Operational/Distributable Cash Flow Coverage
U.S. Silica Holdings 1.9% 4.63
Hi-Crush Partners 7.5% 1.56
Emerge Energy Services 8.7% 1.1
Industry Average 1.60%
S&P 500 1.84%

Sources: Yahoo! Finance, Multpl.com, MLPdata.com, Morningstar.com.

Oil production still likely to increase
The way Wall Street has treated frack sand suppliers recently, you'd think U.S. shale oil and gas production was grinding to a halt and that domestic oil production was likely to fall in 2015. In fact, there are two reasons this is not likely.

Source: Enterprise Products Partners investor presentation.

This chart from Enterprise Products Partnersshows that as long as oil averages $65 per barrel in 2015, U.S. oil production is still likely to increase, even if new oil well drilling declines by 35%. However, with the current oil price at $55, isn't it possible even the above projections might prove overly optimistic?

It's impossible to predict oil markets with any accuracy, and it's very possible for oil to average below $65 per barrel over the next year. However, there are strong reasons to believe OPEC will cut production at its June 5 meeting and help stabilize prices at much higher levels.

Nation Oil Price/barrel required to break even/balance budget
U.S. producers $38-$77
Qatar $58
Kuwait $59
UAE $90
Saudi Arabia $92
Angola $94
Russia $101
Iraq $116
Venezuela $117
Algeria $119
Ecuador $122
Nigeria $124
Iran $136

Source: Reuters.

As this table illustrates, almost all OPEC members are now selling oil at prices far below what is needed to balance their budgets and supply social services to their people. Many of these countries don't have the financial reserves to be able to tolerate oil prices at current levels longer than a few months, greatly increasing the likelihood of a production cut announcement on June 5 that would likely result in a strong oil price rally.

The takeaway: frack sand suppliers are oversold and represent great long-term income growth investments
With oil prices cut in half in recent months, pretty much anything to do with oil has been brutalized by Wall Street's fickle fists of fury. However, with long-term, highly profitable contracts in place that cover production that is yet to come online, cash flows at U.S. Silica, Hi-Crush Partners, and Emerge Energy Services are all likely to continue climbing next year. This means not only are their relatively safe, mouthwatering yields ripe for the plucking, but also that those payouts might actually increase next year. If oil prices finally rebound in the second half of 2015, as I think they will, then these beaten-down investments could very well be among the best investments of 2015 and beyond.

The article Why These 3 High-Yield Energy Stocks May Become Some of the Best-Performing Stocks of 2015 originally appeared on Fool.com.

Adam Galas 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.