Your Money: Some easier ways to invest in gas and oil

You can invest in gas without an MLP.
You can invest in gas without an MLP. (MICHAEL BRYANT / Staff)
Posted: September 26, 2012

We have heard from readers who insist that they want to invest in America's oil- and gas-drilling industry, but not always through one of the more common vehicles, known as master limited partnerships.

A master limited partnership is different from a corporation. It is a group of partners, rather than a separate entity. The most distinguishing characteristic of MLPs is that they combine the tax advantages of a partnership with the liquidity of a publicly traded stock.

Investors often don't want the hassle of investing in something that isn't structured like a plain-old share of stock. For example, Kinder Morgan Partners (symbol: KMP) is a popular master limited partnership. A lot of investors have praised the fundamentals of the company and the high yields, but if they own Kinder Morgan Partners or other MLPs in their portfolio, they likely didn't receive tax forms related to capital gains or losses from the partnership until late May or even June.

That's too late to file your taxes on time by the April 15 deadline, and MLP investors usually have to file for extensions.

Kinder Morgan came up with at least one solution: They formed a limited-liability corporation that is a general partner in Kinder Morgan Partners, and it trades publicly under the symbol KMI. It's a sort of "tracking stock" for the underlying oil and gas businesses, without the tax complications.

Whether you're for it or against it, oil- and natural-gas exploration in America is an industry that should only grow, according to a July 2012 presentation, "Prospects for U.S. Oil & Natural Gas" by Adam Sieminski of the U.S. Energy Information Administration ( www.eia.gov). The Marcellus Shale conference at the Pennsylvania Convention Center last week was packed with investors looking for ideas on how to exploit the trend.

Shale gas alone is expected to grow from under a quarter to about 50 percent of U.S. gas production between 2010 and 2035, Sieminski noted. If the drillers have their way, and domestic prices stay low, the United States could become a net natural-gas exporter by 2022. U.S. imports of liquid fuels would also fall due to increased domestic production - including biofuels - and consumers and manufacturers switching over to natural-gas powered trucks and cars. Cummins Inc. (CMI), for example, makes natural-gas and diesel engines.

As investors, we want more ways to invest in energy independence, not total independence perhaps, but less reliance on foreign imports. Money managers such as Joseph Patton, who runs J.P. Marvel Investment Advisors, have found a few other ideas beyond MLPs.

Patton, who oversees about $350 million for high-net-worth clients, endowments, and foundations, says he is focusing on suppliers to the energy industry. Among the largest are makers of energy-related power and aircraft turbines such as General Electric (GE), the American icon of industry. The stock had a terrible showing after CEO Jeff Immelt took over and the 2007-08 financial crisis hit the equity markets. But Patton started buying it at $18 a share.

"In our portfolio, we like to express the trade with GE, which is making big moves in the energy area, as well as health-care imaging devices and developing giants such as China," Patton said. "GE has been out of favor for so long. It dropped down to $6 a share because of the credit crunch, but since then Immelt has been cutting deals aggressively in emerging markets. It has plenty of room to grow."

Patton also owns QEP Resources Inc. (QEP), a spinoff from Questar Corp. (STR) in 2010 and a natural-gas investment choice. QEP Resources is an independent natural-gas and oil-exploration and production company focused in the Rocky Mountains and the Midwest, and QEP gathers, compresses, and processes natural gas.

QEP has an accelerated program buying acreage in shale basins and in August agreed to buy North Dakota oil assets from companies including Sundance Energy Australia, expanding its Williston Basin acreage by 30 percent.

For investors, there are alternatives for investing in oil and natural gas domestically that can prevent any hassles come tax time.


Erin Arvedlund is a finance reporter and a resident of Philadelphia. Contact her at erinarvedlund@yahoo.com or 646-797-0759.

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