Stop Imagining Possibilities; Start Seizing MLP Profits

Source: James Baldwin, Money Morning  (2/8/12)

"The midstream sector of the energy supply chain is the best and easiest way to make money in energy today."

On Monday, Kent Moors challenged me to offer you a way to make some money in energy.

I started scanning the energy and agricultural stocks I monitor, and began combing financials, looking for some undervalued little company about to pop.

Then I stopped.

I already knew a failsafe way to ace Kent's challenge. And so do you. We talk about it all the time.

It's the midstream sector of the energy supply chain. And it's the best and easiest way to make money in energy today.

I want you to understand the value of these companies, which are involved in the gathering, transport and storage of oil and gas. Not in terms of just how important they are to the industry, but also how important they can be to generating very strong returns for your wallet.

Because if you're ignoring them, you're missing out.

Big time.

That's why today I'm going to share with you one investment opportunity in Kent's Energy Advantage portfolio that is blowing the doors off and making investors a killing.

And you can join in.

The Golden Age Continues

The United States is in the early stages of one of the greatest financial booms in its history. Technological advances in horizontal drilling have allowed companies to access natural gas and oil resources once thought to be unattainable.

Upstream gas drillers continue to develop shale deposits in Pennsylvania, New York, Utah and other states. So someone has to take care of all the gathering, feeder and transport pipelines, terminals, storage facilities, fractionating and initial processing of these fuels.

This is what has made Master Limited Partnerships (MLPs) such attractive opportunities.

These midstream companies make their money by charging transport fees for the fuels they process. And over the past few years, these fees have remained almost constant, even though natural gas prices have dropped considerably.

MLPs offer investors the opportunity to make profits in two ways.
  • The stock appreciates in value, due to growth in the sector and strong financial returns.

  • The stock pays higher-than-average yields and quarter distributions to investors (otherwise known as dividends).

The yield benefit is driven by the fact that all company profits are distributed directly to partners and the investors, bypassing corporate taxes.

And when we identify MLP plays that do both at the same time, that's when we really start to see some profits.

A 139% Return in Under Three Years

MLPs are attractive investments. So are the indices that track their overall performance.

And for the last 18 months, Energy Advantage readers have benefited from growth of one fantastic index.

The JPMorgan Alerian MLP Index ETN (NYSE:AMJ) tracks the performance of the booming energy MLP sector. Created in 2009, the market cap-weighted index currently pays an attractive yield of 5%, while the underlying share price has doubled in a little less than three years.

The index offers many of the same benefits of investing in a traditional MLP. The two biggest benefits are those opportunities to acquire a strong yield and to reinvest those dividends into appreciating shares.

This two-step process unleashes the power of income investing.

Just how much potential are we talking about?

Well, let's see.

Say you had purchased 500 shares of AMJ in October 2009 at an opening price of $19.78. They would have cost you $9,845.

Every quarter, the company would have paid you distributions for each share. By reinvesting these profits, you could have purchased between seven to nine new shares each quarter.

And that's where the money starts to really flow.

After 11 quarterly distribution payments and reinvestment in shares, you would have seen a 139% return today. Before taxes, that $9,845 would currently be worth $23,486. That's a $13,600 gain in just a little more than two-and-a-half years. (If your investments have done anything like that since 2009, my hat's off to you.)

That is the beauty of midstream income plays. They offer the power of compounding interest and the value of potential share appreciation.

Now, most MLP plays won't double in terms of its underlying share price this quickly. . .

Right?

Actually, it's not impossible. Given the low cost of natural gas at the moment, it certainly creates a buying opportunity for companies that are engaged in both exploration and production (E&P) and midstream operations of the fuel.

And there are a host of MLPs that offer high yields as well as long-term potential for very strong returns.

Own one of those, and you're well on your way.

After all, we're not far away from the United States becoming a major exporter of natural gas to an energy-starved world.

When that happens, we'll see a major boost to midstream firms. They'll be lining up to meet rising global demand and transport fuels around the country and to the ports.

And just how far away are we from this scenario?

Well, just a little more than two-and-a-half years. The same amount of time it took AMJ to offer that 139% return.

So whether you're investing $500 or $50,000, I urge you to stop imagining the possibilities, and start seizing the profits.

We'll keep looking for the best ways for you to do so.

Sincerely, James

P.S. And if you're interested in accessing Kent's favorite MLP income plays in addition to AMJ, you'll want to take a look at his latest research. Just go here now.

James Baldwin, Money Morning

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