Oil & Gas Prices: The Pipeline to Profits by Chad Shoop, The Sovereign Investor
- Oil’s massive drop in price has caused many investors to flee from oil-related holdings.
- Natural gas has filled the space left by oil in the investment world.
- How we made a 19.5% return by selling a put option on one natural gas storage and transportation company.
The oil and gas sector has taken a beating during the past few months, with the CBOE Oil Index down approximately 19% from its September high, despite last week’s attempt to bounce back.
With the excess supply still in the market, oil is expected to remain weak during the near term. You would be forgiven if you believed there isn’t a bright spot to be found among the oil and gas companies.
Even though this sector may sound a bit risky for a short-term trade, there is one group that is poised to rally during the next three months, and I can show you how to take advantage of this hidden gem.
The Electron Global Fund was up 2% for September, bringing its third-quarter return to -1.7% and its year-to-date return to 8.5%. Meanwhile, the MSCI World Utilities Index was down 7.2% for September, 1.7% for the third quarter and 3.3% year to date. The S&P 500 was down 4.8% for September, up 0.2% for the third Read More
Natural gas pipelines hold the best opportunity when the price of oil is tanking. Investors start to panic when they see a major commodity, such as oil, drop so far so fast. In fact, black gold is down about 50% since June. As a result, investors have sold anything even remotely related to oil.
The link between the two is simple: If oil is cheap, demand for natural gas gets reduced. And if the energy world operated in a vacuum, then that relationship would very well be the case.
But the fact is that natural gas is still a cheaper, cleaner alternative and in high demand. The link mentioned above doesn’t account for contracts to supply a certain amount of natural gas that will likely keep demand at least stable into the later part of next year.
A Bargain in Natural Gas
I have uncovered several pipeline opportunities, but there is one that my Pure Income readers just locked in at a 19.5% gain — Spectra Energy Partners.
Spectra is one of the largest Master Limited Partnerships (MLPs) in the U.S., operating more than 17,000 miles of pipeline. It also owns interest in storage facilities for natural gas and crude oil. It is the largest transporter of natural gas to New England and the second largest to New York City. Indeed, it controls 12% of all gas consumed in North America.
When I placed the trade back in September, it was hard to find a cheap MLP in the natural-gas business — but that was exactly the opportunity Spectra represented.
The security was trading at just 11 times earnings, compared to an average of 25 times amongst its peers. The shares were a bargain because the sector is going through a correction, and Spectra was one of the high-fliers that investors had singled out for profit taking.
So when investors decided to jump back into the pipeline plays, Spectra was going to be a favorite because it was so cheap. And that’s exactly what happened.
To take advantage of the rebound in Spectra, I sold a December $50-strike put option in September. All I needed was for the stock to close above $50 on the date of expiration, which was last Friday. Shares finished at $55, which was 10% above our strike price. As a result, subscribers who sold the December put collected 19.5% in income over just three months.
Spectra is a stock that I will be returning to again and again. And it’s a company you should be considering as well.
A Steady Income Stream
The company has proven over the long term that it is able to return increasing amounts of cash to shareholders. Spectra operates a string of natural-gas storage and transportation assets that generate a safe, stable stream of cash flow for the firm.
Since Spectra went public in 2007, it has increased its dividend payment each and every year. And take a look at the projections for the next couple of years:
That’s the type of dividend growth I like to see in a company. Spectra wrapped up its 28th consecutive quarter with an increase in its dividend.
It has several open projects right now, and plans to expand its project book to $36 billion.
The stock currently pays out a decent 4.2% dividend yield.
I would follow these shares closely, and if you get a pullback below $53, I will be looking to sell puts against the stock — especially if it involves an oil-driven price drop.
Editor, Pure Income