CEA Monthly Issue – September 2015
Commodity Industry: Energy Infrastructure
As loyal Commodity ETF Alert subscribers are fully aware, the energy industry downturn of the past year has been severe.
Not only have share prices of small- and mid-cap oil and natural gas explorers been taken to the woodshed, but their large cap brethren have suffered mightily as well.
Is it safe to venture back into the oil and gas exploration industry?
Not yet. While the technical and fundamental factors required for an outright buy recommendation are looking better, we’re not quite there yet.
However, there’s an often overlooked sub-sector of the oil and gas industry that’s presenting a remarkable opportunity.
Let me explain…
Throughout the US, there are many thousands of miles of pipelines carrying crude products to various locations. This vast energy infrastructure is an essential component of making the life we enjoy possible.
Of course, I’m talking about the midstream oil and gas sector.
Midstream operations consist of the transportation, storage, processing, and wholesale marketing of petroleum products. It could be raw crude oil, natural gas, natural gas liquids, or refined petroleum products.
Here’s the deal…
The midstream sector has been dragged down right along with everything else in the energy industry this year. For example, top-tier pipeline providers like Enterprise Products Partners $EPD and Magellan Midstream Partners $MMP are down 24% and 14% year-to-date, respectively.
However, much of the downturn in the midstream space is due to investors throwing the baby out with the bathwater. After all, pipeline operators are not subject to the same extreme revenue downturns currently being seen in the exploration space.
That’s because the midstream space typically gets the majority of their revenue from storage and transportation contracts that pay the same whether the price of crude is $35 a barrel or $95.
Lucky for us, this unwarranted downturn in the energy infrastructure space is providing a spectacular long-term opportunity…
Not only is there hefty capital appreciation potential from current oversold price levels, but this industry in known for paying hefty dividends.
As you may know, publically traded pipeline companies are largely classified under a Master Limited Partnerships (MLPs) tax status with the IRS. In exchange for this tax-free status, companies must pass the majority of their income on to investors in the form of dividends.
Here’s where it gets really interesting…
Judging by the price action of major midstream players over the past month, we’re very likely witnessing a bottoming process in this industry.
As a result, it’s the perfect time to place a risk-controlled, diversified bullish bet on an industry rebound.
What’s the best way to make this wager?
The UBS ETRACS Alerian MLP Infrastructure Index ETN (NYSE: $MLPI) tracks the Alerian MLP Infrastructure Index, which consists of 23 top-tier energy infrastructure companies.
Simply buying $MLPI gives you an instantly diversified bullish position in the US midstream oil and gas industry!
And here’s the best part…
We’re going to get paid handsomely, just for owning $MLPI. That’s because this diversified ETN pays a sweet 6% dividend.
I’ll give you additional details on this trade in our monthly update in a few weeks. For now, just focus on buying $MLPI at any price under $31.50.
Here are some additional details on our purchase…
Technically Speaking:
WHAT TO DO NOW:
UBS ETRACS Alerian MLP Infrastructure Index ETN (NYSE: $MLPI) is trading at $31.19.
Buy $MLPI up to $31.50 per share.
Our profit target is $40.00 or more.
Risk Control Price is $26.52 (or a 15% stop loss from your entry point).
***Editor’s Note*** In rare circumstances, I allow for a 15% stop loss instead of the usual 10%. Quite simply, a 10% risk control price allows for very little margin of error in low priced ETNs like $MLPI that are still in a downtrend. With a 15% stop, $MLPI will likely have the wiggle room it needs to put in a long-term bottom.
Category: Commodity Trading
