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Playing the Natural Gas Revival

12/19/2011 12:31 pm EST


Neil George

Editor, Profitable Investing

Recent merger activity points to better times ahead, but investors in these two names are already collecting handsome dividends, says Neil George.

All of a sudden natural gas is in the news, Neil. What do you think?

Yes it is. I mean, you’ve seen a lot of discussions about some of the various shale production around the US. A lot of rural communities—whether looking at Pennsylvania, Ohio, Texas, Oklahoma, and a variety of others, as well as North Dakota—are seeing the potential of being able to really make very significant use of some existing lands with some of the newer technologies of fracking.

At the same time there’s been a lot of political discussion about some of the regulations revolving around that. Even though we’ve seen some of the discussions about starting to implement some more severe restrictions by the EPA, politically, regardless of what side of the political aisle you’re on, there is a lot of movement to try to create jobs if you will.

Even if it means, yes, some environmental damage, the idea that jobs really right now are trumping some of the environmental concern. Therefore, this really is starting to ramp up again discussions of really making good use of the natural gas that’s in a lot of sort of the newer discovered as well as newly-accessible gas reserves around the US.

Now Karen, one of the things about this is that we’re starting to see evidence that some of the major companies are seeing the next step is going to be occurring. Therefore, as a result we’re starting some very significant takeovers that have already occurred.

Kinder Morgan (KMI) of course has made their announcement they’re in the process of trying to acquire El Paso (EP). We’ve also seen Energy Transfer Partners (ETP) basically made a bid for AmeriGas (APU). So we’re starting to see a lot of money and a lot of investment banking activities starting to step into what really has been a fractured market.

There are a lot of independent producers, a lot of independent transporters and distributors. Therefore, as an investor, we’re getting sort of this real sort of upsurge in interest…

In the gas market, you can step in and pick up some of the companies now, I think with a lot more certainty that you’re not going to get some of the political interference that we maybe were expecting in the prior year.

What’s on your radar?
Right now,there are two companies on my radar that I’ve been owning for a while now.

One is a company called LINN Energy (LINE). It’s a low-cost gas and oil producer. Again, a very straight arrow, very concerned about what their production and their environmental impact is, so it’s a very safe sort of play in my perspective.

Another is a company called Holly Energy Partners (HEP), which is also in the process of expanding not just their production of gas but also some of their transfer and storage capabilities.

Now the additional advantage besides just the long-term prospects of being able to capitalize on the gas market is that both these firms throw off a lot of dividend yields. You’re looking at dividend yields in the high-single-digit range, paid on a regular basis, backed up by some very good assets.

So you can get income now, get some growth, and cash in on I think America’s real sort of refocus on the natural gas market blaze.

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