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2 Heads-Up Energy Plays

04/23/2012 11:45 am EST


Neil George

Editor, Profitable Investing

Environmental and legal concerns are threatening the bottom lines of many energy names, but these two have been among the best at avoiding costly problems, says Neil George.

Environmental rules for the energy sector have been in the news, but how can you profit from some of these developments? We’re talking about that today with Neil George. Neil, you have some ideas on that question.

Yes, Kate. I think a lot of people have been looking at shale fracking as being a major bonanza for the US market, and there have been a lot of companies that have been trying to cash in on this, and a lot of individual investors that have been getting on board. Many of these companies pay some strong dividends, and generate a lot of cash flow, so therefore they have a lot of very enthusiastic investors.

But at the same time, we’re now starting to see some of the fallout from some of the so-called fracking technologies. Many communities now are starting to question some of the degradation and water quality. Others are looking at potential earthquakes or tremors that are being caused by some of the disposal of some of the waste products that come from this.

At the same time, on the pipeline front we have a major discussion that’s now part of the presidential campaign. It’s about whether or not we’re going to allow the permitting of a trans-US pipeline basically taking some of this shale, or tar-sands production rather, coming out of Canada and bringing that down to the Gulf with the so-called Keystone XL Pipeline. All the potential environmental threats that it might represent to water aquifers, as well as other issues to wildlife…therefore, right now, people are starting to say well, maybe we need to start rethinking this.

Now, Kate, the key thing is that I’m not necessarily someone who’s going to start pooh-poohing the whole thing of investing in this market, but the idea is dealing with some responsibility. And the key thing is that it’s not just being responsible, but trying to avoid having a regulatory disaster.

We’re starting to see some municipalities and even states now are stepping in. The recent development, Kate, has happened in Pennsylvania, where the state legislature is in the process of passing legislation, which will create some uniformity as far as enforcement of shale. This might very well start to shake out some of the companies, many of which many of your viewers might already own right now.

So, tell us about some of these then.

I think the key thing you want to look at is if the company you’re investing in is very much involved, in particular, in the Marcellus Shale, which is sort of that Mid-Atlantic state area—Ohio, deep in Pennsylvania, reaching up into New York, and so forth. This is one where I think you’re going to see some potential issues.

Also, if you’re looking at some of the other shale production, particularly down into the Kentucky, even down into Arkansas, we’re seeing some potential regulatory changes that might put your company at risk. And if you’re in some of the pipeline businesses, you need to be focusing on where some of your pipes are going, particularly some of the pipes in the Midwest—Nebraska particularly is starting to look at some environmental legislation that might impact your companies.

But Kate, the key thing is not all is lost, because there are some companies that are in these markets that are really operating not just in an environmentally responsible way, but are very focused on avoiding liability.

So Neil, what are some of these that you like?

Well, let’s look at first: companes that are very good at pumping oil and gas out of the ground while avoiding some of the legal entanglements of shale. One of the companies is LINN Energy (LINE). It trades on the Nasdaq, and they have often times appeared at the MoneyShow conferences basically telling their story.

It’s a company that I’ve basically have invested in myself pretty much since they came to the market not many years ago. The company actually had investments in some significant shales, which were actually liquidated at a very good profit because they basically saw better opportunities without some of the legal entanglements.

It’s one that pays a very strong dividend, typically in the 7% to 8% range. And again, if you look at the overall performance, it’s consistently generating those double-digit returns while avoiding some of the potential liabilities that might be coming from the environmental front.

On the pipeline front, the idea is that the Keystone XL Pipeline maybe gets approved, maybe gets embroiled in presidential politics. But why deal with that when you can look at a company that actually has pipes that can take some of that Canadian production and run it through existing pipes with existing approvals?

The company, which is a longstanding, strong performer, is Enterprise Products Partners (EPD). Again, I’ve invested in it myself.

Enterprise Product and LINN Energy would be the two that are very successful, pay very strong dividends, and get you out of the liability picture that might be occurring in both shale production, as well as some of the pipeline issues.

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