Is This The Best Long-Term Energy Play?

You don’t need me to tell you that the last few months have been a time of massive volatility in energy, indeed in just about every imaginable tradeable market. With massive volatility, though, comes not just increased risk but also massive opportunity, in both short- and long-term trades.

The short-term ones involve spotting likely trends, such as when I recommended a couple of fuel cell stocks three weeks ago, FCEL and BLDP just before they jumped sixty and forty percent, respectively. The long-term opportunities can also be identified based on spotting potential trends, although of a different kind. In the former, you are looking for the next trendy pick, in the latter, for investment themes with long-term appeal and staying power.

To me, the biggest of those in the coming years, never mind weeks or days, is going to be the search for yield. It is what led me to recommend RDS.A back on March 20^th, when it was in the low $20s, and it still applies now.

We live in a world where the 10-Year U.S. Treasury, which, keep in mind, is issued by a government with $23 trillion of debt, returns less than 0.7%, and the debt of some other nations has a negative yield. That creates a problem for large funds and institutional investors, who typically hold some yielding securities to produce regular income and smooth out return.

Based on what Fed Chair Jay Powell said this week, those ultra-low rates are not likely to change any time soon either.

Powell’s position is understandable, but one of its side effects is to push capital into increasingly risky places as the hunt for yield takes place. History suggests that there will be a messy end to that at some point, but given where we are now, that point looks a long way off.

That is why I am currently adding things like Kinder Morgan, KMI, to my portfolio. (I guess that after that statement a disclaimer is kind of redundant but, yes, I do own KMI and there is a good chance I will buy more in the near future).

KMI is one of the largest providers and operators of oil and gas pipelines in the U.S. No surprise then that as the economy was shut down and demand for energy shut down with it earlier this year, KMI, along with all mid-stream energy stocks, got pummeled and lost 60% in a month. That makes sense given the number of their customers facing massive liquidity issues, the collapse in the pull through of crude, and the cuts in capex and rig closures across the industry.

For the stock market in general though, the selloff was overdone and there has been a bounce off those lows. However, not only did KMI and other mid-stream stocks underperform on the way down, they have also also lagged the broader market on the way back up.

Again, completely understandable in the circumstances, but it has created a situation where they still offer some kind of value in a somewhat frothy-looking market, considering there will be pent up demand for what they offer…juicy yields.

KMI currently offers a forward dividend yield of 6.66%, which looks pretty good against the “risk free” 0.69% from the 10-Year. Of course, it is possible that won’t be sustainable and may be cut, but that doesn’t mean that the stock will drop significantly from these depressed levels should that happen. Shell, for example, cut their dividend by around two-thirds shortly after I wrote about them, but is still climbed 50% in the 10-weeks following the piece.

That fact won’t be lost on big, institutional investors. As things return to “normal”, whatever that may look like, they will be looking around for yield to juice their portfolios, and mid-stream stocks like KMI could be major beneficiaries.