Pipelines Provide Portfolio Energy

With oil hovering between $45 and $55 a barrel, well off its high of $145, it may be a good time to think about wetting our beaks in the oil patch. Stocks in the sector, as represented by the iShare Dow Jones Energy Sector Index (NYSE:IYE), fell by nearly 44% in 2008 and continue their slide today. Given the current economic mess, this could, despite any optimism from Bernanke, last a long time and keep oil and natural gas prices depressed. Smart investors are taking advantage of companies that can profit from oil no matter what direction the price takes.

IN PICTURES: 10 Tips For Choosing An Online Broker

The Proof Is In The Pipelines
One of the more interesting ways to play the energy market is to focus on those companies that provide the vast energy infrastructure crisscrossing North America - pipelines and petroleum storage terminals. These companies' profit is based on the volume flowing through their pipes, not on what that liquid is worth. Many come with regulated fee amounts with inflation adjustments as well as "take or pay" contracts, which require users to pay regardless of whether the capacity is used.

Two Picks For Retirement Accounts
TransCanada (NYSE:TRP) has a pipeline of pipelines with 59,000 kilometers (or 36,660 miles) in all. Add this to its 370 Bcf (billions of cubic feet) of oil and natural gas storage capacity, and it's one of the largest energy infrastructure groups on the planet with assets totaling C$39.4 billion. New projects represent about 80% of the company's CAPEX budget. These include the 1 million barrels-per-day Keystone pipeline that will link the Albertaoil sands to ports in Houston, Texas. In addition, TransCanada functions as an electric utility with 10,900 megawatts of power production in both regulated and unregulated markets.

TransCanada managed to increase its total cash flow in 2008 by 15% over 2007, equating to more than $3 billion. The company is returning some of this to shareholders, offering a 6% bump in its dividend payment. Its shares yield just over 6% and trade at a cheap P/E ratio of 12.

Enbridge Offers A Conduit Network
Another Canadian pipeline superstar, Enbridge (NYSE:ENB), operates a conduit network that transports nearly 2.2 million barrels of oil and equivalents each day. This includes the only pipeline that flows oil from the Western Canadian provinces to the east. Through its 4.4 Bcf of natural gas capacity and its 1.9 million customers of its regulated gas utility subsidiary, earnings have been on a steady rise, almost doubling in 2008. The company's cash hoard is increasing as well, starting 2009 with nearly $547 million in liquid assets. Enbridge, like TransCanada, increased its dividend for 2009. The payout was raised 16 cents to $1.48 per year and currently yields around 5%.

The Partnership Picks
Investors seeking higher yields as well as possible tax efficiency need to look no further than pipeline operators structured as master limited partnerships. Arranged as a partnership, Magellan Midstream (NYSE:MMP) funnels much of its cash flows directly to investors. Currently the units are yielding 9.7%, which represents an increase of more than 170% since Magellan's IPO in 2000. Its $2.7 billion in energy assets include 8,700 miles of petroleum pipelines, an 1,100-mile ammonia line as well as more than 30 storage terminals throughout the Midwest. Magellan is working with bio-fuel's giant Poet Corp. on the first-ever ethanol pipeline, spanning from the country's heartland to the northeast. (Before jumping into this hot sector, learn how these companies make their money. See Oil And Gas Industry Primer.)

Originally spun off from refiner Valero Energy (NYSE:VLO) in 2006, NuStar Energy (NYSE:NS) could be an under-the-radar stimulus package winner. While the partnership boasts an impressive 8,500 miles of pipelines and 86 total natural gas and crude oil terminals, it also operates two asphalt refineries. As one of the largest producers of the black stuff, NuStar could get a large influx of business as states begin construction of new roadways and bridges. Even without the stimulus bounce, NuStar finished 2008 with a 30% increase in distributable cash flow to investors, totaling $5.44 per share. The units currently yield around 9%.

TEPPCO Partners (NYSE:TPP) has the distinction of owning some of the most mature pipeline assets in the country. Its Big Inch and Little Inch pipelines were built just after World War II and remain steady earners for the limited partnership. These two pipelines help illustrate the long-term nature of these kinds of companies. The TEPPCO units yield the highest of any listed, paying $2.92 per share or around 12.5%. For the partnership's recently reported quarter, TEPPCO saw a decrease in EBITDA for all of 2008. This was due to one-time impairments and charges stemming from product inventories, hurricanes Gustav and Ike, and an early debt repayment. The high yield compensates investors going forward for the previous year.

Bottom Line
The current economic mess has left energy prices in the basement. While the bargains are tempting, the current crisis may last longer than initially predicted. Smart investors might want to hedge themselves by investing in energy companies that can profit from oil at any price. The previously-mentioned pipeline stocks and partnership units are a good place to start further research.

Balance risk and return to produce adequate income despite inflation; see Build A Dividend Portfolio That Grows With You.