8 Great Ways to Play the Energy Sector: From High-Yield MLPs to Royalty Trusts

Five energy sector experts and contributors to MoneyShow.com have uncovered their favorite energy investments -- an unusual play on liquid natural gas, a one of a kind royalty trust, a low-risk, diversified mutual fund, two high-yielding midstream MLPs, and a trio of oil ETFs. Roger Conrad, Deep Dive Investing The Alerian Master Limited Partnerships Index is still 54 percent below its summer 2014 highs and the conventional wisdom is the sector is dead money. That's a mistake. MLPs have undergone a major business transformation since then. Contracts with shale producers are still the midstream sector's bread and butter. But the economics of the leading companies are now solid, as the strongest have cut costs effectively and weaker players have been weeded out. At the same time, surging U.S. energy exports have greatly increased demand for transportation and processing capacity. That's created a massive investment opportunity to spur growth. Meanwhile, MLPs' unpopularity means even the strongest ones trade at far lower prices than they did at their peaks. Enterprise Products Partners , for example, yields around 6 percent and has an enterprise value of less than 12 times EBITDA. That compares to 3.5 percent and 20 times at the shares' late 2014 peak. The great irony is as Enterprise's shares have lagged, the MLP has successfully executed on the most ambitious U.S. energy midstream expansion in history. Management has focused the past several years on building a vast network of assets to facilitate America's burgeoning exports of oil, gas and natural gas liquids. Current projects in progress total $6.7 billion. That includes a converted gas-to-oil pipeline that will come into service in April, carrying oil from the Permian Basin of West Texas to the Gulf Coast until 10-year contracts. Two years ago, Enterprise reduced its annual distribution growth rate from roughly 5 percent to about 2.5 percent. Coupled with fee-based cash flows from asset expansion, the savings produced a 155 percent increase in 2018 retained cash flow. 2018 distributable cash flow increased 33 percent to a record $6 billion. Distribution coverage for the fourth quarter was 1.7 times distributions, up from a solid 1.4 times a year ago. Enterprise has also guided to a 50 percent increase in 2019 free cash flow, as five new projects come on stream and share buybacks kick in. Debt-to-EBITDA is now down to just 3.5 times, earning the MLP a sector-high BBB+ rating from S&P. And it doesn't hurt that Enterprise's assets and operations are almost wholly focused in U.S. states that are friendly to the oil and gas sector, especially Texas and Louisiana. If I had to recommend just one MLP suitable for the most conservative income investor it would be Enterprise, particularly at a price more than 30 percent below its 2014 high. Bryan Perry, Cash Machine For power-starved emerging markets, liquified natural gas, or LNG, has become the de facto choice to provide a safe, clean, plentiful, cheap and abundant alternative energy. As of the end of 2018, China, Japan, South Korea and India accounted for half of the growth of total global LNG imports. Supplying these foreign markets involves converting natural gas into its liquid state and loading it on LNG tankers. When a ship arrives at its destination port, the LNG cargo is offloaded onto what is called a Floating Storage and Regasification Unit (FSRU) where it is then transferred through pipelines to power utilities as the final endpoint. The purest income play in the FSRU space is Hoegh LNG Partners LP , the leading floating LNG service provider. Its strategy is to own, operate and acquire floating storage and regasification units and associated LNG infrastructure assets under long-term charters. The rapidly growing LNG industry bodes well for further construction and acquisitions of FSRUs in the future and a further raising of the quarterly payout as well. At its current annual distribution of $1.76, the current yield stands at 9.3%. Hoegh LNG Partners has a very stable distribution history, going back to 2014 when the company paid its first $0.1834 payment that has grown to its current level of $0.44 per quarter. Let's get long in this only publicly traded pure play on FSRUs in what is a booming LNG industry and a mega-investment theme for 2019 and beyond. Investors should note that Hoegh is a growth-oriented partnership set up as a C-Corporation and not as a Master Limited Partnership. So, investors receive income that is taxed as 1099 income and not K-1 income. Thus, buying these shares for IRAs and retirement accounts is suitable for tax purposes. John Persinos, Personal Finance Vanguard Energy Fund Investors Shares is a good choice for investors who want exposure to the energy sector but with minimized risk. The fund invests in companies involved in the exploration, production, and transmission of oil and gas; the making and servicing of component products for energy activities such as drilling and oilfield services; energy research; and energy conservation or pollution control. It is actively managed by Wellington Management Company, which uses a bottom-up approach that emphasizes fundamental investment value. The overriding goal is the potential for significant capital appreciation. The fund seeks energy companies with a history of earnings growth that's resilient to economic cycles. The energy players in the fund's portfolio typically boast reasonable valuations, superb cash flow, huge cash hoards, untapped and vast crude oil and gas deposits, and robust balance sheets. Nearly 60% of holdings are based in the U.S. The holdings in the top 10 account for 44.1% of assets. The shale production revolution in North America turned the U.S. into the world's largest producer of oil. America actually dethroned Saudi Arabia as the king of oil producers, a landmark that we thought we'd never see in our lifetimes. With its preponderance of U.S.-based energy blue chips, Vanguard Energy Fund is a play on this secular trend. Trying to precisely predict the price of oil is a fool's game. Predictions for the price of oil are all over the map. Some analysts expect oil to shoot skyward, while others are calling for its further decline. However, if you're a patient, long-term investor, just remember one thing: Oil is the lifeblood of the modern industrial age; it's the most important commodity in the world. That reality won't change in your lifetime. Every portfolio should have exposure to the energy sector; Vanguard Energy Fund Investors Shares is a convenient and safer way to get it. Tim Plaehn, The Dividend Hunter From the investments on our recommended list, PermRock Royalty Trust is a unique income investment vehicle; as a royalty trust it is not a company and it has no business operations. The trust receives 80% of the net profits from oil and natural gas (primarily oil) production from a dedicated acreage in the Permian Basin. The production operations are managed by Boaz Energy II, LLC. Boaz receives the other 20% of the net profits. The monthly distributions will fluctuate based on the levels of production (which are fairly stable) and the prices received for the oil and natural gas (which are not stable). Distributions for a certain month's production are paid three months later. Because of how the trust operates, I view this investment as a long-term hedge against higher energy prices. I do expect oil to be significantly more expensive in the future. I keep track of the oil supply and demand forces, and the fundamentals favor a continued uptrend for the value of crude oil. As an investor in PermRock Royalty Trust you must understand that the unit price and distribution are very variable. If you bought PermRock Royalty Trust at higher prices (as I did) now is a good time to average down. Kinder Morgan is a large-cap owner and operator of energy infrastructure assets. The company owns an interest in or operates approximately 84,000 miles of pipelines and 157 terminals. The pipelines transport natural gas, refined petroleum products, crude oil, carbon dioxide and more. The terminals store and handle petroleum products, chemicals and other products. Management guidance has 2019 distributable cash flow $5 billion, providing 2.2 times coverage of this year's dividend payments. That is much better than the typical 1.3 to 1.5 times coverage prevalent in the energy infrastructure space. Kinder Morgan plans to increase the dividend by 25% this year and next year. The shares yield 4.0%. Excess cash flow gives a company's board of directors' confidence to not cut dividend rates even when the economy is under pressure. As such, this is a stock that should be able to sustain and possibly grow its dividend through the next economic recession. Chris Preston, Cabot Wealth Network After cratering in the last three months of 2018, crude oil prices are back on the rise; the rebound in oil prices is welcome news for oil stocks -- and oil exchange-traded funds. Oil is becoming a good momentum play again, and the most efficient way to play it is through an oil ETF. Here are three favorites: iShares U.S. Oil & Gas Exploration & Production ETF As the name suggests, this ETF holds oil and gas companies specifically focused on exploration and production. It counts ConocoPhillips , Devon Energy and EOG Resources among its 10 largest holdings (out of 100). The ETF is up 12% year to date, rising as high as $59 after bottoming at $47 on Christmas Eve. Trading in a tight range between $55 and $59 since the big run-up in early January, IEO looks buyable here, with a breakout likely coming soon. United States Oil Fund LP USO is the best pure-play fund that tracks crude oil prices; it's the largest, most liquid of futures-backed oil ETFs, with 23 million shares exchanging hands daily and roughly $2 billion in assets. The fund is up nearly 28% already this year -- riding the coattails of the big run-up in oil prices. In fact, over the past five years USO has had a 0.96 correlation (1.0 is the highest) with crude. That's a good thing now that oil prices are surging again. PowerShares DB Oil Fund This one's a bit more niche, but it's based on the value of crude oil futures contracts, which is where the DBO invests 100% of its assets. Lately, that strategy has been working: the DBO is up 25% this year. This one tends to move fast when oil prices are on the rise, advancing 60% in the year prior to the collapse in crude began last October.

8 Great Ways to Play the Energy Sector: From High-Yield MLPs to Royalty Trusts

An unusual play on liquid natural gas, a one-of-a-kind royalty trust, a low-risk, diversified mutual fund, two high-yielding midstream MLPs, and a trio of oil ETFs.

Columnist Conversation

Wednesday Morning Fibocall for 9/22/2021

The S&P Futures for 'Turnaround Tuesday'

Monday Morning Fibocall for 9/20/2021

COLUMNIST TWEETS

Please Join or Log In to manage and receive alerts.