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Published: March 29, 2010
If you were paying close attention last
week, you might have noticed some of the world's most powerful
groups -- who each have the power to move markets by themselves
-- all said the same thing... albeit in different language.
- Last Tuesday, the Federal Reserve announced that it will
keep interest rates unchanged and at record lows -- a sign
that, according to the Associated Press, reassures investors
that the U.S. is committed to spurring economic recovery:
"Oil and gas demand is expected to increase as economies
recover and businesses hire more workers."
- Then, last Wednesday, OPEC made the announcement that it
will not increase output.
Translation: There's a bullish case for
oil. It's not often all of these market movers make similar
announcements within such a short time period. That's why I
think it's so important to listen.
After rocketing to nearly $150 a barrel... and then falling all
the way back to $35... the price of oil has been in a picture
perfect
bull market, rising past $80 per barrel. And it's no wonder:
- Emerging markets like China -- whose economy is expected
to expand a sizzling +9.6% in 2010 -- are industrializing at
an explosive pace and spurring huge new demand for oil.
- Developed markets like the United States -- the world's
largest consumer of crude -- are recovering from the economic
downturn, which is likely to cause "rebound" demand for oil.
- Meanwhile, the global supply of petroleum is shrinking fast: New
sources of oil are increasingly difficult to find and the
Earth's 1.3 trillion barrels of proven reserves are only
enough to last us the next 40 years at current rates (and
far less if the uptrend in the world's appetite continues).
In short, all of the factors that helped
push oil to nearly $150 per barrel in 2008 are still with us
today... even after a nasty recession. I think the economics are
simple: increased demand and shrinking supply mean oil prices
have nowhere to go but up.
Of course, we're income investors, not
commodity speculators. Income is everything to us, and oil
prices are notoriously volatile, even if I think they're likely
to rise. By earning a stream of dividends we can offset some of
the damage if the price of oil doesn't go our way, while also
enjoying fat dividend checks.
That's why I've been hunting for plays that should gain on
rising oil prices... but also pay healthy yields.
I'll be honest, most traditional oil stocks leave much to be
desired. The best choice is French oil giant Total SA (NYSE:
TOT). It pays a solid 5.5% right now, but the company only
makes two dividend payments per year.
I think investors can do better.
You see, there are plenty of oil companies paying frequent --
and high -- yields. But you've likely never heard of them.
That's because these high-yielding oil plays are in the ranks of
small producers.
I'm talking oil producers with market caps of roughly $3 billion
or less. In other words, businesses that are just 1% the size of
ExxonMobil (NYSE: XOM). A quick screen pulls up 13 small
oil producers yielding above 7%. Some have market caps as small
as $300 million.
Many of these high-yielding businesses, such as Pioneer
Southwest Energy Partners (NYSE: PSE), are set up as master
limited partnerships -- a tax-advantaged status that means more
cash is available to pay distributions. This structure is one of
the reasons they're able to pay such high yields.
Most also have other segments of their business besides
production, such as the processing and shipping of crude and/or
natural gas. While this diversification does mean the units
won't move in lockstep with rising crude prices, I think you'll
find their high yields are certainly worth the trade-off.
-- Paul Tracy
Editor
StreetAuthority
P.S. - I'm not the only looking for high yields from
small producers. StreetAuthority's foremost income expert, Carla
Pasternak, recently featured a tiny oil company as her "Stock
of the Month" within High-Yield Investing.
The jewel she found has never missed, slashed or cut one payment
in its history. And in the past year, when the price of oil has
leapt from about $40 a barrel to $80 a barrel (a +100%
increase), this oil investment delivered +177.5% total
returns... yet still pays 10.2%.
Follow this link to learn more about Carla's "Stock of the
Month." |
