Navigating the Energy Roller Coaster

09/24/2009 12:00 pm EST

Focus: STOCKS

Neil George

Editor-in-Chief, Income Publication and Products, Agora Financial

Neil George, editor of By George, says the key to investing in energy markets is to find good energy stocks that have reliable earnings and pay steady dividends.

The trouble with petrol markets is that they're really just like any other market. I've never found a market for anything that keeps climbing ever upward without corrections, slides, or major plunges.

You don't need any of this. You just need to know the companies in petrol that aren't reliant on ever-soaring prices to make them work.

This means finding companies that might not be the headliners, but [that] have the ability to generate steady cash during bull and bear markets. That's what it's going to take to make the petrol market profitable for your portfolio.

And just as important, not only do we have to focus on steady performers, but also steady payers of bigger dividends.

Oil, of course, has been on a tear over the past several months, with prices rising [more than 50% so far this year]. But [crude prices fell more than 8% in one week in September,] while gas prices [fell] more than 13%.

The broader energy market as tracked by Standard & Poor’s is down some 25%, which is even worse than for the general market as tracked by the S&P 500.

So, how can you actually make money in a market that, while recovering for a while, is still down hard for the past year and is down hard over the past week?

There are a few key areas to look at. First is the actual production of gas and oil. Not every exploration, development, and production company suffers when petrol prices plunge.

Several are so low cost and sensibly managed that they can keep making nice fat margins even if gas and oil keep slipping in price.

A prime example is Linn Energy (Nasdaq: LINE). This is structured in the nice tax-advantaged form of a partnership. The company therefore isn't taxed as a corporation, so you get the advantage of avoiding the dreaded double taxation of dividends.

Linn keeps plodding along, paying a nice fat double-digit yield over and over again. And overall returns for the past 12 months—despite the cratering of gas and oil—are 15%+. And it's getting better, with the performance so far this year generating a total return in excess of 50%. (It closed below $24 Wednesday, just below its 52-week high and yielded more than 10%—Editor.)

Sunoco Logistics Partners (NYSE: SXL) in the mid-Atlantic area is perhaps one of the steadiest of transporters of core petrol products. And for those eyeballing the current market for both storing and transporting ultra-cheap liquefied natural gas (LNG)—look little further than to Teekay LNG Partners (NYSE: TGP). (Sunoco closed above $59 Wednesday, and Teekay closed above $24, both near their 52-week highs.)

Both are nicely positioned to work for your portfolio right along with Linn. All pay well, with steady to rising dividends—without the drama of trying to hold and hope for higher petrol prices.

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