The Egyptian uprising, having sent oil prices to surge, highlights the volatile nature of commodities investing. Funds like the iPath S&P GSCI Crude Oil ETN (NYSE:OIL) spiked on the news. While the general long term trend is upward, short term "hiccups" can send asset prices on a roller coaster. As populations continue to swell and demand more resources, investing in the sector makes sense. Investors who still want exposure to the energy sector can take advantage of companies that can profit from oil, no matter what direction the price takes.
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Focusing on Infrastructure
One of the more interesting ways for investors to add the energy market is to focus on those companies that provide the vast energy infrastructure crisscrossing North America. All across the country, various pipelines, petroleum storage tanks and switching terminals help move traditional energy from the wellhead to processing facilities for use. These infrastructure and pipeline companies' profits are based on the volume of oil or gas that flows 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. This allows investors to profit from the long term trend of increasing energy demand, while providing a backstop against price swings.
In addition, pipeline companies organized as Master Limited Partnerships (MLPs) are rapidly becoming the security du jour as investor interest in the space has flourished. In 2010, MLPs generated a total return above 30%. They posted in similar extraordinary gains in 2009, increasing over 50%. Based on their corporate structure, MLPs pass on the bulk of their revenue to investors. Unit holders are rewarded with 6-7% average dividend yields and other tax advantages. Investors have flocked to them in droves over the last few years as a way to beef-up their income in this era of low interest rates.
Adding Barrels Without Bottoms
Despite their impressive runs over the last few years, many analysts still see the sector producing mid-single digit total returns, in the 6% to 8% range, for 2011. MLPs are only slightly sensitive to interest rate changes due to the previously mentioned inflation adjustments in contract pricing. Investors looking to add energy exposure should consider the sector. For those looking to focus strictly on the infrastructure and pipeline side of MLP universe, skipping the popular JPMorgan Alerian MLP Index ETN (NYSE:AMJ) maybe in order as the broad fund also includes many E&P firms. The broad-based UBS E-TRACS Alerian MLP Infrastructure ETN (Nasdaq:MLPI) follows 25 different firms, such as Buckeye Partners LP (NYSE:BPL), that focus only on pipelines and storage terminals. The ETN yields around 5.5%.
El Paso Pipeline Partners (NYSE:EPB) has the distention of owning one of the only gathering systems in Utah, Colorado and Wyoming. As the sole owner and operator of the 800 mile Wyoming Interstate pipeline, El Paso averaged triple-digit sales growth over the past five years. Shares currently yield 5%.
For investors looking for other types of pipeline plays, both TransCanada (NYSE:TRP) and Enbridge (NYSE:ENB) offer excellent additions to portfolio. Enbridge, which handles the bulk of Canadian oil exports to the United States and TransCanada, represents the country's biggest pipeline company. Expansion plans for both firms are based on expanded shipments of oil sands crude to the United States. Shares of TRP yield 4.2% and ENB pays a 3.4% dividend.
The Bottom Line
While the general long-term trend for energy prices is upwards, commodities prices are volatile bunch. Companies such as Niska Gas Storage Partners (NYSE:NKA), or the previously mentioned pipeline stocks and partnership units, are a good place to start further research. (Long-term energy outlooks which suggest a fundamental energy shift to natural gas. See Natural Gas Forecast.)
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