STOCKS

Big news out of Anadarko Petroleum (APC) on November 14. The company announced a huge new reserve in Colorado’s Niobrara shale formation estimated to hold up to 1 billon barrels of recoverable oil.

But the best way to take advantage of that—and the expansion of Anadarko’s increasing oil shale production in general—isn’t to buy Anadarko. The euro debt crisis and fears of a global economic slowdown are likely to keep oil stocks from moving up in the next six months or so.

Instead, I’d look to Western Gas Partners (WES), a master limited partnership set up by Anadarko in 2008 to manage existing gas gathering systems, gas treatment plants, and natural gas and oil pipelines—and to build new ones.

Western Gas Partners will see higher revenue and earnings as it transports the increasing volumes of oil liquids and natural gas being produced by the boom in oil and gas production from shale formations in Wyoming, Utah, Colorado, and Texas.

Unlike Anadarko shares, which pay a dividend yield of just 0.45%, units of Western Gas Partners pay a dividend of 4.4%. I think the units also offer good potential for capital appreciation—as more wells in the areas served by Western Gas Partners plants and pipelines go into production, the partnership will see rising volumes through its system and increasing cash flow.

Credit Suisse projects that EBITDA (earnings before interest payments, taxes, depreciation, and amortization) will climb to $256 million in 2011 and $301 million in 2012, from $186 million in 2010. That will let the partnership increase distributions per unit to $1.65 in 2011 and $1.89 in 2012, Credit Suisse projects, up from $1.44 in 2010. The partnership raised the distribution by 4% on October 12 for unitholders of record on October 31.

Anadarko owns about 43% of the limited partnership units, and the oil company has said that it expects to own 33% to 50% of Western Gas Partners over time. (If you’re new to the world of master limited partnerships, there are some tax wrinkles that you should understand before you buy. I’d suggest this article from Investopedia to get started and then this long post from William Baldwin of Forbes to dive deeper)

The units traded for $36.12 as of 12:30 p.m. New York time on November 16. I think $40 is a reasonable 12-month target price.

Add that 10% price appreciation to the 4.4% dividend and you’re looking at 14.4% return in a year. As of today, November 16, I’m adding them to my Jubak’s Picks portfolio.

(The yield’s not quite as high as I’d like for a pick in my dividend income portfolio. But the potential total return makes this a good low risk pick for the Jubak’s Picks portfolio in a risky stock market .)

Full disclosure: I don’t own shares of any of the companies mentioned in this post in my personal portfolio. The mutual fund I manage, Jubak Global Equity Fund, may or may not now own positions in any stock mentioned in this post. The fund did not own shares of any stock mentioned in this post as of the end of September. For a full list of the stocks in the fund as of the end of September, see the fund’s portfolio here.

Tickers Mentioned: WES, APC

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