Anthony Speciale Stock Market Analyst

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How to Profit From Higher Energy Prices

All I can say today is, “The government did it!”

I’m talking about higher oil prices and gas prices and skyrocketing natural gas prices, which are going to have an impact on the economy.

After all, so much of our electrical generation and industrial power is supplied by natural gas. That stuff just keeps going up in price, so it’s going to be very inflationary.

We’ve got anti-fracking policies being actively discussed in Congress, we have massive financial incentives for consumers and businesses to switch to renewable energy regardless of the long-term cost impact and then we have utilities that are forced by state or federal law to have a certain percentage of their electrical output come from renewable sources.

But what happens is that as you begin to cut back the usage among utilities and by industrial companies, the oil and gas producers are going to stop producing as much oil and gas.

It’s simple supply and demand… If you begin to reduce the supply of something in the face of steady demand, prices are going to go up. There’s no other way around it.

Now, in years past, when oil and gas got to very high levels, the producers would flip the switches and start pumping again. But they’re not doing that this time.

They’re too concerned about what the federal government could do to penalize them for producing too much oil and gas, so they haven’t stepped up to fill the void.

And under the current administration, they’re not going to, which could very well keep oil and gas prices higher than is healthy for the economy. And again, it could be a big driving force for inflation.

How to Make Money from Higher Energy Prices

My favorite way to play this situation is with the pipeline businesses, for a few key reasons.

First, oil and gas have to go from point A to point B, and that involves shipping them through pipelines.

Second, no one wants a pipeline running through their neighborhood, so they tend to get voted down even in places that desperately need them. Remember… It’s all about supply and demand.

One of my favorites in this space right now is Energy Transfer LP (ET), which has one of the major pipelines services the Marcellus Shale gas areas as well as in just about every other important oil and gas field in the continental United States.

They operate 90,000 miles of pipelines in 38 states and Canada, so this is a pretty good-sized company.

It is structured as a master limited partnership (MLP), so it pays out cash to investors that yields about 6.7%. But after paying out the dividend, they still have about $1 billion of free cash flow left.

And they’re putting that money to good use by paying down the corporate debt now and over the past several years. That strengthens the company and makes it much more valuable.

So management is doing the right thing by its shareholders and giving the company a much better chance of surviving bumps in commodity prices.

Looking Ahead

Energy Transfer LP is also starting to acquire some renewable infrastructure, including solar and wind farms, to supply electricity.

So they’re willing to change and adapt, but they’re also generating a lot of cash flow right now from oil and gas moving through pipelines. And that’s going to continue for a very long time.

The company is also ridiculously undervalued and could double or more from current levels, giving investors a very nice total return from what I see as a low-risk energy opportunity.