3 Ways to Play the Fracking Boom This Week

You can boost your yield on any or all of these names by selling call options

   

You should read and absorb two pieces of news over the weekend. Then see how much change you can pull out of your couch pillows and do some investing on Monday.

The United States Geological Survey revised upwards – in fact, more than doubled – its estimate for reserves of oil and gas in the Bakken shale formation that has made North Dakota the second leading oil producing state.

Second, the U.S. trade deficit shrank 11% in March (year over year) due, in large part, due to falling imports of oil, which now stand at seven million barrels per day, the same as they did in 1996.

Why now? Fracking. This oil and gas extraction process is an evolution of traditional hydraulic fracking that uses water and chemicals to crack open underground formations to release  natural gas and oil. What we now call fracking was first used to exploit the Barnett Shale formation in Texas in 1998. I like three companies with high yields in this area, and if you sell calls, you can more than double those yields.

Calumet Specialty Products (NASDAQ:CLMT): Calumet is a refiner – but its business is not what you think. The company’s refineries turn out specialty products – CLMT dominates the market for aviation lubricants, makes the wax in lipstick and has a diesel to gasoline mix that helps insulate profits from gasoline prices. Calumet refineries are in the Midwest and the company is building a brand new one in  North Dakota. The yield is 7.2%; that new refinery is going to boost profits and I assume dividends; the stock is up roughly 50% since I first found it a year ago and still has room to run.

Martin Midstream Partners (NASDAQ:MMLP): This outfit operates around the Gulf – where a lot gas ends up, much of it from the southwest, including the newly exploited shale fields in the Eagle Rock Formation. MMLP cleans up gas, stores gas, transports gas and gas production is booming as evidenced by pipeline construction is up 82% this year. A good part of their business is based on unit volume, not the price of gas. The stock is up 30% since I first told my subscribers about it a year ago – and it still has a yield of 7.6%, a dividend flow I expect to increase alongside the flow of gas.

Suburban Propane (NYSE:SPH):  Suburban Propane is the nation’s leading distributor of propane, an increasingly popular fuel for more than backyard barbecues (I am a charcoal guy, I like my carcinogens straight up).  More businesses are using propane in part because it is very clean; the RV boom means more propane on the road; the housing uptick means more barbecues. More importantly, the supply of propane is increasing and prices in many parts of the country are falling. The Carlyle Group (NASDAQ:CG) is renovating and reopening a refinery outside of Philadelphia to process natural gas liquids (NGL) including propane, coming from the Utica shale fields in northern Pennsylvania that will support a big part of SPH’s service area. The yield is 7.3% and the stock is up slightly less than 20% in the past six months.

The best play here is to buy the shares then sell and manage calls – you can earn up to $5 extra per share on CLMT, boosting the yield to almost 19%; with MMLP, the yield could double; with SPH, to almost 17%.

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