Pipeline Stocks Offer Indirect Play On Crude Oil

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Pipeline companies offer investors an indirect way to play crude oil while receiving sizable income distributions.

Yet, there is a hitch. About two of every three stocks in the Oil & Gas-Transportation Pipeline industry group are thinly traded.

Among the stocks trading at least 400,000 shares daily,Plains All American Pipeline ( PAA ) has the highest Composite Rating with a 94.


The Composite Rating combines all five IBD ratings into a single number.

Plains is a master limited partnership engaged in the transportation, storage, terminaling and marketing of crude oil and refined products, as well as similar functions with natural gas liquids.

From an income investor's perspective, Plains is a gem. On Oct. 4, the company announced it would increase its quarterly payout from 53.25 cents a share to 54.25 cents, payable Nov. 14 to shareholders of record Nov. 2.

This marked the 13th quarter in a row that the company increased the payout and the 32nd increase in the past 34 quarters.

The annualized yield is 4.7%.

Earnings increased 46% on a 10% revenue gain in the second quarter. Q3 results will be reported Nov. 5 after the close. The Street expects EPS to fall 22% on a year-ago basis on a 4% revenue gain.

Part of the reason for the weak Q3 estimates is because of a tough comparison. Revenue jumped 38% in Q3 2011 and EPS leapt 103%, thanks largely to pipeline expansions and acquisitions.

The company invested $1.9 billion of capital for pipeline expansions and acquisitions in 2011 and is expected to invest $2.8 billion in 2012 and beyond.

Oil drilling and production can affect demand for pipeline companies' services. At the earnings call in August, CEO Greg Armstrong said, "Market conditions may not be as favorable during the second half of 2012 as they were in the first half." He added, though, that the long-term outlook looks good for drilling activity and production.

One risk is regulation, which doesn't always follow political labels. The last major expansion of pipeline regulation was signed by President Bush in 2006.



The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of The NASDAQ OMX Group, Inc.



This article appears in: Personal Finance , Investing Ideas

Referenced Stocks: PAA

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