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Middleweight Champ Packs a Punch

02/07/2011 12:49 pm EST


Mark Skousen

Editor, Forecasts & Strategies, High-Income Alert

With oil and natural gas prices on the rise, these cash cows will only get fatter and hotter, writes Mark Skousen in High-Income Alert.

With the economy finally on the mend, energy prices already are in an uptrend. Oil is trading near $89 a barrel.

[Energy stocks have outperformed crude prices lately, notes Tom Aspray—Editor.]

We have a toehold in the oil patch with our shares of Cheniere Energy Partners (AMEX: CQP) (more on that one below.) But let’s expand our holdings in the sector by also picking up shares of EV Energy Partners (Nasdaq: EVEP).

Based in Houston—and with a proven 16-year track record—EV acquires and operates oil and gas properties within the continental United States. Its current holdings are located in the Appalachian Basin, the Monroe field in Louisiana, Michigan, the Austin Chalk, South Central Texas, the Permian Basin, the San Juan Basin, and the Mid-continent area.

EV has reserves of approximately 60 million barrels of oil, with a reserve life of roughly 15 years. Its financial metrics are strong. Revenue rose 42.2% last quarter. Profit margins top 74%. And management is earning a healthy 17% return on equity.

Of course, we always insist on a great dividend—and we’ll pick up a 7% yield here, too. Don’t delay. The partnership already has announced a quarterly distribution of 75.9 cents a share, payable on Feb. 14 (think of it as a Valentine from the oil patch), to shareholders as of Feb. 7. As energy prices already are trending higher, I see no good reason to wait.

Quarterly results—out March 14—should be exceptional. And profits this year will be at least 25% higher than the approximately $2 a share that EV earned last year.

Place a protective stop at $35. [Shares closed near $43 Friday—Editor.] If you prefer to play this one more aggressively, try the June $45 calls, which last traded at $1.85.

[Roger Conrad recently recommended another high-yielding energy producer—Editor.]

Cheniere’s Cool Yield From LNG
Cheniere, which is also based in Houston, owns and operates the Sabine Pass liquefied natural gas receiving terminal in western Louisiana on the Sabine Channel Pass. The terminal has regasification capacity of 4 billion cubic feet per day and five liquefied natural gas storage tanks.

The outlook for Cheniere is improving. Operating margins already exceed 75%. But a spate of cold weather could cause demand to rise. And I expect the company to exceed near-term earnings estimates. In the meantime, we’ll pick up a handsome 7.5% current yield.

Place a protective stop at $18. [Shares closed at $22.57 Friday—Editor.] If you prefer to play this one more aggressively, try the June $23 calls, which last traded at $1.30.

[Jim Jubak  recently discussed another natural gas transportation play. Transporting gas beats owning it, as the commodity remains in abundant supply after a terrible 2010 —Editor.]

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