Investing in your favorite oil driller or gold miner is risky business.
Resource companies, like these, go to great lengths. Whether it be mining for gold hundreds (or thousands) of feet underground in South Africa or drilling for oil amidst the rolling sea-swells in the North Sea, it takes a certain ilk to profit in this business.
Investing in these plays harkens the same level of expertise.
Today I want to take a look at a few pitfalls in the resource sector. But, instead of lamenting about profits we could’ve made, I want to take those lessons learned and hand you one simple strategy to stay ahead of the S&P or any other market barometer in the year to come.
First though, let’s lament.
The resource sector is filled with pitfalls. Looking at your own portfolio I’m sure it’s easy to pick out the stocks you shouldn’t have bought. Same goes for my calls…
Back in 2009 I remember beating the drum for one specific oil company (BP), because of its superb ability to get oil to the surface efficiently and pay a nice divided.
Then, as it were, if you followed the news in spring of 2010 then you know BP’s Macondo well blowout in the Gulf of Mexico was a tragedy of epic proportions. Something that even this big oil standout couldn’t stop.
The tumble in BP’s share price couldn’t be stopped either. Along with falling from over $60 to under $30, the company cut its longstanding dividend. If you were looking to weather the storm, this wasn’t your shelter.
Yep. To say investing is tough, in these proverbial waters, is quite an understatement.
Same goes for some of the gold mining woes we’ve seen this year.
Don’t get me wrong – I like, scratch that, I LOVE big oil and big gold companies – but even the big dogs in the gold sector appear to have their tail between their legs.
As we’ve covered extensively, this year (and last) has been a struggle for big gold. Miners can’t control costs and gold is getting harder to find (in large mineable amounts.) Add it up, and buying into these companies, much like the BP buy turned out to be a 24-month disaster.
Luckily there’s a strategy that could get us back on track.
An Investment Strategy For 2013…
Okay, enough of the bad news and horror stories in the resource sector. Like any savvy investor, we need to get up, dust ourselves off and keep an eye out for the best way to keep making money.
Today I see an opportunity right in our wheelhouse – that still has plenty of upside.
I’m talking about “midstream” players. These are the companies that transport and process oil and gas that flowing profusely from America’s shale patch. Earlier this year we covered a similar idea – something that is referred to as the “harvest” phase.
Today there’s mounting evidence that these players are going to continue to rake in money – by charging a fee for transport of oil and gas – and continue paying solid dividends.
The story is easy to follow, too. With each passing day the U.S. is producing more barrels per day. This simple up-tick in production is creating all sorts of opportunities around the country. All of a sudden there’s a glut of oil in Cushing, OK. Who profits from this glut? The guys that can move the oil.
Same goes for natural gas. With so much of the stuff flooding the pipelines there’s plenty of opportunity to process and move it. Propane, Butane, Ethane… any company, from Texas to Pennsylvania, that can process this gas stands to make a buck. And better yet, pass some of that buck a long to you!
Here’s a few of the best midstream players we’ve covered:
• Access Midstream Partners LP* (ACMP) – 5.4% • DCP Midstream Partners LP (DPM) – 6.8% • Plains All American Pipeline LP (PAA) – 4.7% • Williams Partners LP (WPZ) – 6.6%
[*Note, this is the former Chesapeake Midstream…
a spin off from Chesapeake’s ailing energy company]
With more oil and gas flowing – through pipelines, trucks and railways – these logistic companies are in the right spot of this budding market (and the list above is by no means exhaustive, either!)
Remember, production from many of the now-prolific shale plays in the U.S. is just ramping up. Take a look at the table I shared back in October:
More oil and gas, regardless of price, will mean big things for the U.S. midstream sector.
That’s great news for us. But it gets even better…
First, these midstream companies love to pay consistent dividends. At a time when the Federal Reserve is printing U.S. dollars like Chinese carry-out ads, these stable dividends couldn’t come at a better time.
Second, we’re still keeping an eye out for a pullback in market prices. That said, if any of these midstream assets fall in price – due to the fumbling U.S. Congress – there could be a short window of time to pick em up on the cheap. That means lower entry price and higher dividend payout.
Getting back to our discussion above, the U.S. midstream sector is one of the safest places to stock some investment cash. A lot of the variables that can plague other resource sectors – dry holes, bad core results, high costs, and overzealous management – don’t apply here. Simply put, these are some of the most straightforward resource bets you can make.
If you’re looking to stuff your portfolio with homegrown dividend plays, hopefully on the cheap, you’ll want to keep an eye on the midstream guys.
Keep your boots muddy,
Original article posted on Daily Resource Hunter
The Managing Editor of the Daily Resource Hunter, Matt is the Agora Financial in-house specialist on commodities and natural resources. He holds a degree from the University of Maryland with a double major in Business and Environmental Economics. Although always familiar with the financial markets, his main area of expertise stems from his background in the Agricultural and Natural Resources (AGNR) department. Over the past years he's stayed well ahead of the curve with forward thinking ideas in both resource stocks and hard commodities. Insley's commentary has been featured by MarketWatch.
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