Tags: MLP | oil | Kinder | Alerian

Look to Midstream Energy in a High-Priced Stock Market

By    |   Thursday, 19 February 2015 08:11 AM

The stock market just reached another all-time high. At the same time, bond yields are near all-time lows. International stocks are cheap, but the world is going to hell in a hand basket.

Where is there a good place to invest right now?

One particular area of the U.S. market that has gotten cheap is oil stocks. The recent 60 percent free fall in the price of crude oil has left some wreckage in the energy sector. The Energy Select Sector SPDR (XLE) exchange-traded fund (ETF), which comprises 45 of the largest companies in the oil, gas and consumable fuels and energy equipment and services industries, is down 20 percent since its highs in the summer.

But the energy companies more affected by oil prices have fallen much farther. Some exploration and production companies and offshore drillers are down 60 percent or more. These stocks represent the best bargains right now and are probably great buys for the long term. But the carnage might not be over yet and it could be a while before they start to really come back. It might be too early.

But there are areas in the energy sector that I believe are worth getting in now. Specifically, I like the midstream energy companies. These are companies, often master limited partnerships (MLPs), involved in the transportation and storage of oil and gas. They simply collect a fee for the service of storing and/or transporting crude oil, petroleum products and natural gas from producing fields and refiners to sellers.

Most midstream MLPs have little or no exposure to commodity prices. They just depend on the volume of oil gas moving around the country. With the solid economy and the fact that oil and gas are cheaper, volumes should be strong and many of these companies should do great. Nevertheless, midstream energy companies have been knocked back with the rest of the energy sector.

The Alerian MLP ETF (AMLP), which tracks 25 large MLPs in the Alerian MLP Infrastructure Index, is off 10 percent just since September. While that's hardly a massive correction, the stocks should have gone higher because business is booming. They've been held back by the oil crash.

But investors are starting to wake up.

AMLP has already moved up approximately 7 percent from the low in January. The ETF currently yields a stellar 6.6 percent, which is a tremendous income in this environment. The ETF is also a great way for investors who don't own any midstream MLPs to get broad exposure to the sector.

In terms of individual plays, I like Kinder Morgan (KMI). Although no longer an MLP after a recent restructuring, Kinder is the largest energy infrastructure company in North America. It operates a massive network of pipelines and storage terminals across the country.

This company is a monster. And in this environment bigger is better. The country is undergoing a massive boom in oil and gas production. But the current infrastructure is insufficient to accommodate the massive new supplies. The opportunity for growth for midstream companies is enormous, but mostly for those companies with deep enough pockets to take advantage.

The stock pays a solid 4.3 percent dividend yield backed by revenues that are 85 percent fee-based. Kinder also has strong growth potential, with a backlog of projects of more than $17 billion to accommodate the growing demand. The company has also stated its intention to increase the dividend by an average of 10 percent per year through 2020.

The U.S. market might be high, and pundits may be down on things. But there are still great opportunities in certain pockets.

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The stock market just reached another all-time high. At the same time, bond yields are near all-time lows. International stocks are cheap, but the world is going to hell in a hand basket.
MLP, oil, Kinder, Alerian
Thursday, 19 February 2015 08:11 AM
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