Schlumberger (SLB): On the oil-services side, I think you go with Schlumberger. I wish it paid more than 1.5% in yield, but you give that up for its projected 19% long-term EPS growth rate. That’s an amazing rate considering how long Schlumberger has been around. In fact, SLB is arguably trading at a decent price at only 18 times earnings. SLB has $12 billion in cash and investments offset by only $10.4 billion in debt, and always pumps out free cash flow.
Kinder Morgan Energy Partners LP (KMP): I also think that you want the big name in pipeline master limited partnerships (MLPs), Kinder Morgan Energy Partners LP. KMP provides the infrastructure for energy products to flow though — everything from gas, diesel and jet fuel to natural gas. It’s set up across more than 80,000 miles of pipelines (including natural gas). It even transports carbon dioxide, owns and operates seven oil fields and has loads of storage space. Best of all, with KMP being the MLP part of the Kinder Morgan structure, it pays a beautiful 7.2% yield.
BP Prudhoe Bay Royalty Trust (BPT): I also suggest exposure to revenues from direct drilling, so I think a royalty trust is a good idea. BP Prudhoe Bay Royalty Trust holds royalty interests in the Prudhoe Bay field, which contains proven reserves of 75 million barrels of oil, almost all of which are developed reserves. Royalties flow to shareholders as a 14.2% dividend. The stock is also well off its high, so it’s a good time to get in.
Williams Companies (WMB): You also want exposure to natural gas. I don’t like buying the commodity itself, but prefer an infrastructure play to reduce risk. Williams Companies is a good choice. After spinning off its drilling arm, WMB is now a pure infrastructure play. WMB has a 3.9% yield.
ETFs: Of course, you may prefer to just go with ETFs to spread your risk. In that case, you are pretty much covered by selecting PowerShares Dynamic Oil & Gas Services (PXJ), which covers infrastructure plays, and the Energy SPDR (XLE), which is a broad basket tilting more toward the actual producers and distributors of fuels.
As of this writing, Lawrence Meyers was long XOM. He is president of Asymmetrical Media Strategies, a crisis PR firm, and PDL Broker, Inc., which brokers financing, strategic investments and distressed asset purchases between private equity firms and businesses. He also has written two books and blogs about public policy, journalistic integrity, popular culture, and world affairs. Contact him at email@example.com and follow his tweets at @ichabodscranium.