Tale of Two American Energy Stocks

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Within just 17 years the United States will be completely oil independent. For a country that imported 60% of its oil as recently as 2005, it's a huge shift.

This change creates some interesting choices for investors. Given the time horizon of this growth, it pays to be picky. Not every American oil and gas company will skyrocket overnight - or necessarily at all.

Today I'm going to tell you a story about two companies that should be prospering from the American energy boom. And I'll show you the stark difference for their shareholders.


One of these companies is Chesapeake Energy ( CHK ). The company is the biggest domestic producer of natural gas in the U.S.

This $14 billion energy giant owns interests in 45,000 wells scattered across the entire country. In just about every energy formation, you'll find Chesapeake drilling wells.

The company's primary focus is natural gas. Chesapeake spends huge amounts to find new wells and bring them into production. Unfortunately, the growing production has been offset by falling prices for natural gas.

As a result, Chesapeake reported a net loss of $940 million last year. The company can afford to pay shareholders only a 1.6% dividend. The stock price isn't making up for that tiny dividend either - it's fallen nearly 60% in the last five years.

Another company with similar stakes in the natural gas business is Kinder Morgan Energy Partners ( KMP ). Kinder is also a big player, with a market cap of almost $32 billion. 

But Kinder isn't in the business of producing natural gas.  Instead, the company is involved in transportation. And this is perhaps the most profitable aspect of the energy business.

Using 33,000 miles of pipelines, Kinder transports natural gas throughout North America. In this pipeline business, the company gets paid for transporting oil and gas regardless of the market price for the commodity.

This means that the pipeline company gets paid based on volume - or the amount of gas being transported. The more gas it moves, the more it gets paid.

Last year, Kinder earned a profit of $1.3 billion. The company's revenues were about 30% below Chesapeake. Yet Kinder turned a healthy profit instead of a billion dollar loss. 

It won't surprise you to learn that Kinder has been a great investment. The company pays a generous 5.9% dividend, and has a history of increasing payments to its shareholders.

That healthy yield is complimented by a rising stock price. Over the last five years, the stock is up a total of about 45%.

Finding big oil and gas discoveries may seem exciting. But for investors seeking both capital gains and a growing income stream, sometimes the boring companies like Kinder have much more to offer.

This is a special breed of company, known as a Master Limited Partnership or MLP.  These companies have a special tax status that is good for shareholders. By design, Kinder is set up to reward shareholders with rich dividend payments.

Some executives and companies are intent on delivering profits to shareholders. Others are more interested in growth for the sake of growth. When it comes to my own investment portfolio, the choice is crystal clear.

I'll take the juicy 5.9% dividend from Kinder over that tiny 1.6% payment from Chesapeake any day of the week.



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: Investing , Stocks

Referenced Stocks: CHK , KMP

Wyatt Investment Research

Wyatt Investment Research

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