The Best Oil and Natural Gas Play in America

David Fessler
by David Fessler, Energy & Infrastructure Strategist

The Best Oil and Natural Gas Play in America

by David Fessler, Investment U's Energy and Infrastructure Expert

Wednesday, May 4, 2011

Is there one absolute "best play" in the American oil and natural gas sector?

Actually, there is. But you'd probably run through all the major refiners, and a bunch of exploration and production companies, and you still wouldn't have hit on it.

You see, it's not some junior E&P company in one of the shale plays, or an equipment company supplying some specialized piece of equipment to deep-water drillers, a big refiner, or one of the majors with billions of barrels in proven reserves.

Sure, there are great companies in all of those sectors. But the company I'm talking about doesn't drill, explore, or refine oil or natuarl gas. But many of the companies engaged in those businesses are crucially linked to this company, and would be out of business without it.

Every day, it just does the same simple thing, day in and day out. Its income stream is about as predictable as the sun coming up and setting each day. And even though it's firmly embedded in the oil and gas sectors, its revenue and profits generally continue to rise, regardless of whether oil and gas prices are soaring or dropping like a stone.

You see, this company's business is all about consistency: doing the same thing over and over and over. Its business model has been the same since it's been in business, and that's nearly two decades. In fact, it pioneered the whole concept of the business model it now operates under.

Take a look at the following chart. If you invested in the S&P 500 back in the 1990s, you'd be up about 200 percent right now. Not too bad. But if you had put some money into this company at the same time, you'd be up over 1,200 percent, including reinvested dividends.

Kinder Morgan vs. S&P 500 over 20 years

Oh, did I mention it sports a healthy 5.9 percent yield at current prices? So, have you already guessed which company I'm talking about?

The "Apple" of the Oil and Natural Gas Industry

Kinder Morgan Energy Partners (NYSE: KMP) is what I believe to be the Apple of the oil and natural gas industry. It's the largest of all of the pipeline limited partnerships, and by most accounts, the best managed.

You see, all it does is transport other companies' products around the country, through its network of 37,000 miles of pipelines and 180 terminals. Its pipeline networks reach the hottest and most active shale and natural gas plays, including the Bakken and the Eagle Ford shale formations.

It transports natural gas, crude oil, refined petroleum products, CO2, and other liquid products and chemicals. Its vast network of terminals not only store petroleum products, but handle coal, coke and steel, as well.

From a performance perspective, you couldn't ask for a better company. It just raised its first-quarter 2011 quarterly cash distribution by seven percent (compared to a year ago), when it reported last week.

But this wasn't a one-time raise of its dividend. It has a long history of raising its dividends as its stock price has increased in order to keep its yield around five to six percent. Its long-term annual growth is targeted at around five percent.

Since Kinder derives the bulk of its revenue from the transport of oil and gas, the price of what's in the pipe has almost no effect on how much Kinder gets paid. It's simply the tollbooth operator, or the "meter-reader."

Want Higher Growth? The Kinder Morgan Trifecta Has It All...

Kinder Morgan, Inc. (NYSE: KMI) is the general partner of Kinder Morgan Limited Partners. It sports a lower yield (around four percent), but is set up as more of a growth play, with the company aiming for approximately 10 to 11 percent annual share appreciation.

Either way, you win, but if the markets have you a little jittery, Kinder Morgan Energy Partners is the more risk-averse of the two.

As the economy continues to improve and the amount of oil and gas that's used continues to increase, Kinder's revenue - and its share price - will likely come right along in lockstep, just like it's been doing for years. And investors who jump on the bandwagon get paid 5.9 percent to enjoy the ride.

Good investing,

David Fessler

comments powered by Disqus