Prime Picks In Pipelines

By Aaron Levitt | October 17, 2011 AAA

With the markets returning to their state of ebb and flow, many investors feel frustrated to say the least. As the market reacts and overreacts to each piece of good or bad news, volatility has returned with a vengeance. The energy sector could be the poster child for this increased volatility. Oil prices have risen and fallen continually over the last few months and currently sits at $85 a barrel. Events such as the Egyptian and Libyan uprisings have not helped matters much, sending crude prices on a roller coaster. For investors in the sector, it's enough to make your head spin. However, there are ways to profit from the world's increasing demand for energy without relying on the direction of oil and natural gas prices.
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Big Money in Pipes and Storage
Energy investors may want to take a look at the companies that provide the vast energy infrastructure crisscrossing North America. This backbone of pipelines, switching terminals and petroleum storage tanks is a vital link in getting traditional energy from the wellhead to the processing facilities. For investors, the key is in how these firms make money. Functioning like a toll-road, profits for the pipeline operators are based on the volume of oil or gas that flows through their pipes, not on what that liquid is worth. In addition, many of these pipeline firms operate with "take or pay" style contracts, which require users to pay regardless of whether the capacity is used or not. Many also act with regulated fee amounts as well as with inflation adjustments. This allows investors to profit from the long-term trend of increasing energy demand, while providing a backstop against price swings. (Find out how to take advantage of this market without having to open a futures account. For more, see A Guide To Investing In Oil Markets.)

This was evident during the last financial crisis. When oil fell from $145 down to $40, many E&P firms were hit hard as the price of oil no longer covered the cost of production. Meanwhile, the pipeline firms saw their earnings decline only slightly, remained profitable and raised their dividends during that time.

In addition, the sheer number of new prolific energy fields such as the Bakken, Eagle Ford and Marcellus are greatly increasing the demand for oil and gas transport. Analysts estimate that the 328,000 miles of natural gas transmission and gathering pipelines won't be enough to tap America's natural gas boom. A study by ICF International (Nasdaq:ICFI) shows that the U.S. will need to add about 1,400 miles worth of new pipelines each year and both the United States and Canada will require a total midstream natural gas investment of about $205.2 billion from 2011 to 2035.

Adding Energy's Toll Roads
For investors, the natural gas and oil pipeline owners offer a great way to stay invested in the energy sector without directly worrying about crude oil prices. Funds like the ALPS Alerian MLP ETF (Nasdaq:AMLP) or The Cushing MLP Total Return (NYSE:SRV) make interesting broad choices for a portfolio. However, there are plenty of individual firms that might be better picks.

Enbridge Energy Partners LP (NYSE:EEP) is a great way to play the growth in pipeline capacity. The firm already operates thousands of miles worth of gas and liquid pipelines, but has been aggressively expanding its capacity. The company recently struck a deal with its general partner Enbridge (NYSE:ENB) to upgrade portions of its lines in western Canada and the U.S. In addition, the firm has partnered with Enterprise Products Partners L.P. (NYSE:EPD) to build the Wrangler pipeline, which will connect the oil-storage hub of Cushing, Oklahoma to refiners on the Gulf Coast. Both EEP and ENB make great choices and yield 7.5 and 2.9%, respectively.

El Paso Pipeline Partners (NYSE:EPB) makes another compelling portfolio choice. The firms new Ruby pipeline, which feeds natural gas into California's Pacific Gas & Electric's (NYSE:PCG) interconnect, has seen its usage explode over its short life span. Shares of El Paso yield 5.1%.

The Bottom Line
With volatility returning to the energy sector, investor's may want to focus on the pipeline firms. Their boring and steady characters make them ideal plays in this volatile market. The proceeding firms along with Boardwalk Pipeline (NYSE:BWP) make ideal selections. (For related reading, see Unearth Profits In Oil Exploration And Production.)

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