An Energy Play to Buy on the Dips

09/16/2008 12:00 am EST

Focus: FUNDS

Bryan Perry

Editor, Cash Machine, Premium Income, Quick Income Trader, Instant Income Trader

Bryan Perry, editor of The 25% Cash Machine, finds an energy partnership he says is attractive now.

This is only a short-term correction in a secular bull market for oil and natural gas—and it’s provided us with a great entry point.

This correction is driven by the fear of further losses in the energy patch, because of lower demand from the slower global economy. The fear has increased recently and is primarily responsible for oil and gas prices trading lower.

[So,] circumstances are ripe to add an oil and gas pipeline transportation stock to our
energy holdings, while the sector is undergoing this correction. And we’re adding the “best of breed.”

Kinder Morgan Companies is one of the biggest pipeline transporters and terminal operators in North America. It has an interest in (or operates) more than 37,000 miles of pipelines that transport natural gas, crude oil, and petroleum products. Kinder also has about 165 terminals to store and transfer products like gasoline and coal.

Most assets are held at Kinder Morgan Energy Partners LP (NYSE: KMP), one of the largest publicly traded pipeline limited partnerships in America, with an enterprise value of $20 billion.

KMP is the largest independent transporter of refined petroleum products in the United States; a major transporter and storage operator of natural gas; the largest independent terminal operator in America; a significant transporter of crude oil and petroleum products from Alberta to British Columbia, Washington state, and the Midwestern United States.

In the latest quarter, Kinder Morgan hit a grand slam, posting monster numbers and providing unit holders with solid forward guidance. The Partnership increased its quarterly cash distribution to 99 cents per share, or $3.96 annualized, from 96 cents, or $3.84 annualized. KMP has increased the distribution 33 times since February 1997.

While no company is 100% immune to external conditions, KMP continues to demonstrate that a diversified portfolio of stable assets is capable of generating consistently strong cash flow, even in very difficult market conditions.

As crude oil prices continue to rise (on a long-term basis), we’ll see more emphasis placed on natural gas, because its development, production, and transportation costs become competitive with oil at around $80 per barrel. As such, companies like Kinder Morgan’s mix of transported products should become an ever-larger percentage of its business. For taxable accounts, I recommend taking a full 3% position in units of KMP. For tax-deferred accounts I recommend taking a full 3% position in shares of Kinder Morgan Management LLC (NYSE: KMR).

Units of KMP are trading at around $53.50, down from $61, and shares of KMR are trading at around $49, down from $57.32. When you consider that so many other energy stocks have been crushed by up to 30% in the current correction, Kinder Morgan assets shine because, relatively speaking, they’ve held up like champs.

Buy whichever position you need at up to $60.

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