Energy expert Elliott Gue explains why these lesser-known stocks have a good chance of outperforming the supermajors this year, with solid dividends to boot.

Elliott, you're an energy expert. I'm gathering from all of what you're telling us these days that there's really several different markets to take advantage of the energy booms in the US and abroad.

Right.

Where do we look in the United States for all the energy boom that's going on there, particularly with gas and all the discoveries?

I think one of the most interesting areas in the US is really infrastructure, in the form of pipelines and storage facilities, because the problem with shale is a lot of these plays are in places that don't have a lot of pipeline capacity.

So for example, in North Dakota ten years ago, nobody thought North Dakota would ever be a particularly important oil-producing state, so there's not a whole lot of pipeline there to take the oil that they're finding in the Bakken shale now. A rapid ramp up in production, but not enough take away capacity.

As a result, you have companies like EOG Resources (EOG) that are actually using trains to move oil from that region to market. Union Pacific (UNP) is actually becoming somewhat of an oil play right now, because they actually have unit trains that run oil from the Bakken shale down to Cushing, Oklahoma, and then onto the Gulf Coast.

I think infrastructure is going to be a big theme going forward. A lot of these stocks are organized as master limited partnerships or MLPs, of which I'm sure many of your listeners are aware.

They're an interesting group, partly because they offer fairly high yields. The average MLP currently yields 5% or 6%, and a lot of them also offer some significant growth potential because they're out there building these pipelines and storage facilities that are needed to produce and manage the growth of all these shale finds.

One name I like a lot is a company called Western Gas Resources (WES). They own a series of natural gas gathering pipelines as well as processing plants—processing plants are used to remove natural gas liquids from the natural gas stream; that would be things like propane, ethane, butane. All the Rocky Mountain states down into Texas, they own pipelines all along this route.

What I really like about them is that their parent company, their sponsor company is a company called Anadarko (APC), one of the largest independent exploration and production companies in the US. They've been doing dropdown transactions to Western Gas. What that means is that they own pipelines which they sell into the MLP.

Every time they do that, the MLP tends to boost its distribution, so over the last few years they've been growing their distribution at a 15 to 20% annualized pace. They yield about 4% or 5%, and then grow their payout by 15% or 20% a year.

I think that's going to continue for the next few years, and as a result of that rapid distribution growth that's basically guaranteed by the parent company Anadarko, they're one of the few MLPs that really outperforms the broader market in 2012.

And what are they yielding approximately in early 2013?

In early 2013 they're yielding about 4.5% to 5%, but...

Are you expecting it to grow at 20%?

15% to 20% a year. The management's currently saying 15%. Traditionally they've low-balled the estimate and ended up outperforming, so I think that's a great way to play it.

Have you got some more names?

Sure, absolutely. Among the producers, again I kind of like some of these MLPs, the reason is that they are...not only do they offer nice dividend yields, but in many cases they've hedged against low natural gas prices, which are a real problem for some of the exploration-production companies. Gas prices have been very depressed over the last 24 months or so.

One of the names I like is Vanguard Natural Resources (VNR). This company, their primary growth avenue...

Nothing to do with Vanguard Funds.

It's nothing to do with Vanguard Funds. I get asked that question every time I mention this name, but it has no relationship whatsoever.

They pay out a monthly dividend, which a lot of people find attractive. They currently yield around 8%, a little over 8%. Their real growth avenue in coming years is going to be actually acquiring natural gas properties, natural gas liquids-producing properties.

You know, gas prices are very depressed right now, but the valuations of these properties are also very low, so they're able to buy them at such depressed prices that they can actually still generate distribution growth and enough cash flow to cover their distributions. So I think you'll see continued growth in their payout over the next few years, and you get a nice monthly dividend which adds to about an 8% yield.

And how much growth? How much growth in the earnings?

Right. They've just made a series of acquisitions in late 2012, which they're just consolidating in their results, so I think in 2013 that's going to allow them to boost their distributions somewhere around 5% to 10%.

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