How to Play the Plunge in Oil
11/18/2014 9:00 am EST
The best way to play oil after the plunge in prices are elected oil field service providers and midstream partnerships, explains Dr. Kent Moors in Oil & Energy Investor.
The companies that provide either a broad array of services or meet special niche needs with little effective competition are the preferred moves here.
The first draws our attention to the big boys, Schlumberger Limited (SLB) and Halliburton Co. (HAL).
The second points toward smaller, focused providers like Newpark Resources (NR), a well site preparation company that also has a big interest in fluid management and water disposal. Both of these two things are essential in the fracking process.
Then there are the midstream providers. In this part of the sequence, there are several midstream companies that offer the best of both worlds: income and share price appreciation.
And today, there are some interesting developments in this segment involving new arrangements of pipeline, terminal, storage, and related assets.
This has introduced a range of midstream limited partnerships (MLPs) that are able to combine separate profit centers all under one roof.
A perfect example would be Plains All American Pipeline LP (PAA), which is moving its traditional midstream operations into downstream applications.
PAA provides pipeline and related services for natural gas liquids and crude oil, as well as the marketing of the volume downstream. As an added bonus, the company also provides a very nice 4.7% annualized dividend.
Of course, MLPs have long been a major component in the midstream sector. These holdings center about midstream assets, which, until recently, included only pipelines and pass through all of their profits to their partners, bypassing taxes at the corporate level.
When an MLP decides to float stock to retail investors, it is also floating a percentage of the asset ownership. That usually translates into a higher dividend payment, well above the market average.
The best way to move on all of these structures is the JPMorgan Alerian MLP Index ETN (AMJ).
This is an exchange-traded note that emphasizes the interest proceeds of the constituent MLPs that comprise the tracking index. Since June 2009, AMJ is up 129% and carries a nice 4.35% dividend.
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