Making Money from Moving Black Gold
Robert is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
It’s been said there are two kinds of people who make money on a gold rush: those incredibly few and fortunate who actually find and dig up gold and those who sell the picks and shovels. Lately, there’s been a gold rush of sorts in American oil and gas courtesy of hydraulic fracturing. With America’s appetite for both oil and gas growing with no end in sight, I think oil and gas transport and storage companies make a compelling and relatively safe “picks and shovels” investment.
Picking a winning oil or gas producer can be tricky. Look at the differences in stock performance between such independent producers as Devon (NYSE: DVN), Chesapeake (NYSE: CHK), Concho (NYSE: CXO) and LINN (NASDAQ: LINE). These companies drill for oil and gas, mainly in the US. CXO is limited to the Permian Basin of west Texas and east New Mexico, while the rest are more geographically diverse. CXO pays no dividend, CHK and DVN pay less than 2% and LINE pays a jaw opening 7.2%. For shareholders, CHK and DVN have disappointed while LINE and CXO have delighted. And CHK and DVN are bigger companies based on market cap. All to say, investing in an oil or natural gas producing company guarantees nothing.
Chart courtesy of The Motley Fool.
Companies making drilling or fracking equipment represent a decent investing option but they’re subject to the ups and downs of petroleum or natural gas prices. Right now, natural gas exploration has tapered off and has likely dampened earnings prospects for companies making or directly supporting drilling operations. So why invest in oil and gas transportation and storage companies? In a nutshell, hydrocarbons don’t do any good at the production site. They need to go from the field to the refinery and then to the customer. Doesn’t matter who produces what or where, the product has to be moved and transportation and storage companies make a buck off of every barrel or cubic foot they handle. For example, shipping oil by pipeline can run about $7/bbl and frequently involves a long term contract. American demand for domestic oil and natural gas continues to climb, so regardless if you drill, baby, drill or not, transportation and storage companies will be making more money moving more product.
Two companies offer two different ways to profit from oil (in particular) and natural gas transit and storage.
For those seeking capital gains with a nice dividend, Plains All American Pipeline (NYSE: PAA) should grab your attention. Based in Houston, Texas, PAA offers a decent 4.8% dividend that the folks at dividendinformation.com say has been steadily growing since 2003. Driving these dividends is a steady rise in revenue. Earnings have generally exceeded expectations since FY 2009. Return on equity is 19%, total debt to equity is 1.1 and its PE is about 16. Best of all, since 2009, PAA has been steadily climbing from $19/share to about $45/share after a recent stock split. The future looks good. PAA purchased natural gas and liquified natural gas operations from British Petroleum (NYSE: BP), a move that gives PAA access to Canadian shale gas. PAA expansion plans in the Eagle Ford and Permian Basin fields should pay off as oil production there continues to climb. I foresee continued earnings growth from these developments.
For those seeking primarily income, Enbridge Energy Partners (NYSE:EEP) fits the bill. This Canadian based master limited partnership pays a 7.3% dividend that has increased annually since 2006. Earnings have been erratic but generally trending upward; the stock price has performed similarly. Currently, EEP trades about 12% off its year high. Return on equity is 14.5 (an improvement over last year) and its PE is around 18. Earlier this month, EEP announced a major upgrade to its Alberta Clipper oil pipeline, which moves oil from North Dakota and western Canada to Midwest refineries. EEP also plans to expand a major oil pipeline in Michigan. However, Michigan residents still remember a pipeline spill about two years ago and the State of Michigan thinks EEP still needs to finish cleaning up the mess. While an expense, I don’t see this as a big hit to EEP’s earnings or dividends.
The US Energy Information Administration projects US natural gas production to almost triple by 2035. Almost unbelievably, the United States may become the world’s largest petroleum producer and may even - brace yourself - export the stuff, possibly within a decade. Somebody has to get these fuels from the field to the consumer and two good “somebodies” are PAA and EEP. Either for capital gains with a “cherry on top” dividend or a pure generous dividend play, these “picks and shovels” companies are investing in bigger pipelines are well positioned to profit as American energy production climbs.
dylan588 owns positions in EEP and BP. The Motley Fool owns shares of Devon Energy and has the following options: long JAN 2013 $16.00 calls on Chesapeake Energy, short JAN 2014 $15.00 puts on Chesapeake Energy, long JAN 2014 $20.00 calls on Chesapeake Energy, and long JAN 2014 $30.00 calls on Chesapeake Energy. 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.If you have questions about this post or the Fool’s blog network, click here for information.