Martin here with important breaking news:
Sunoco Logistics Partners (SXL), an energy stock that Mike Larson has in his model portfolio, is surging to new highs. And there’s a bigger energy story behind it which is also gaining momentum.
Given these events — plus the enthusiastic response we got from my interview with Mike two weeks ago — I just called him again for a follow-up. Here’s the transcript of our call …
Martin Weiss: When did you first recommend this stock and why?
Mike Larson: Last November. Because it’s a Master Limited Partnership (MLP), with all the advantages they bring. Because it’s at the heart of the U.S. energy boom. It’s got strong growth AND good yield. And its diversification is excellent — regionally and across various energy sources: Natural gas. Natural gas liquids like ethane and propane. Crude oil. Refined products. Good stakes in all of these sectors.
Martin: How’s it doing and where’s it headed?
Mike: We bought it at $34.75 per share. Now it’s close to $48, up 38 percent. Despite corrections here and there, I think it’s on its way to $60, possibly much higher. Meanwhile, investors are also getting a dividend yield of 3.1 percent.
Martin: Aren’t there MLPs that yield a lot more?
Mike: Sure. As much as 9 percent or more. But in the world of MLPs, there are some yield plays and there are some growth plays. I chose this one because it’s a good combination of both.
Moreover, you’ve also got to look at the relative safety of the dividend. This MLP has just announced its 37th consecutive increase in quarterly dividends. So the dividend has great staying power.
And never forget: That 3.1 percent is based on today’s share prices — what you get if you start investing today. If you started investing earlier, when the stock was selling for a lot less, your effective yield today is many times more. That’s the big advantage of these MLPs over bonds. You’re not locked in to a fixed payout. Your dividends and yield can keep growing, and in this case, the dividend has been growing every single quarter for nearly ten years.
Martin: What do you think caused the stock’s surge this week?
Mike: The immediate trigger was the big news announced by pipeline tycoon Richard Kinder — a $44 billion megadeal that consolidates Kinder Morgan’s multiple MLPs into one single entity.
Martin: I heard that might put a damper on MLPs, on the way they’re currently structured.
Mike: If it were an industry trend, maybe. But it’s not. It’s strictly Kinder Morgan, driven exclusively by that one company’s internal need for some simplification. And as you can see from the surge in MLPs like Sunoco Logistics, it’s helping to drive them higher — not lower.
Sometimes investors overthink things. In this case, you just need to listen to what Kinder says and take his words at face value: He’s doing this so he can pour more money into energy transportation, pipelines and infrastructure. And that’s a testament to the massive boom we’re seeing there. Looking beyond just one week’s news, that’s the bigger megatrend driving up stocks like Sunoco Logistics so swiftly and steadily.
Martin: Earlier in the week, I noticed that oil prices were down and some energy stocks took a hit.
Mike: Another reason I like the MLPs. When you invest in these companies, you don’t sweat oil price fluctuations. They’re service providers and their business is based largely on volume.
Think of them like toll booths on an energy super-highway. If you go from, say, one million cars on the road to two million cars on the road — if the volume of your business doubles — and you can keep charging the same toll every day, your revenues double. Even if you cut your prices, say, 5 percent, your revenues are still 95 percent better.
That’s what’s happening with these MLPs. They’re not wildcat explorers that rise and fall with the price of crude. They’re Steady Eddie service providers. So as pipeline and storage networks grow in the U.S., they’re in the best position to capitalize.
Martin: Larry Edelson and I have been warning about the spreading chaos in major oil-producing countries like Iraq and Libya; and that’s just the beginning. Nigeria is also in trouble. Russia is making threatening moves in eastern Europe. Other OPEC countries, even Saudi Arabia, could be affected. What does that do to oil prices? How does that affect the U.S. industry?
Mike: The Big-Picture point is that the turmoil overseas is actually a great benefit to the broad U.S. energy sector, including the companies that do rely on energy prices.
Despite all those new supplies from the U.S., world oil prices have not fallen. They’ve flat-lined around the $100-per-barrel level, give or take a few bucks.
Martin: Because of the turmoil overseas.
Mike: Yes. Bigger supplies in the U.S. have been offset by shrinking supplies overseas — especially in failed or failing states like Iraq and Libya. That gives the U.S. energy industry the best of both worlds — rising volume PLUS continuing high prices. Even if oil prices don’t rise a penny — even if they go down — the U.S. still benefits.
America is finally curtailing its reliance on unstable parts of the world for its energy supplies. This gives the United States a great incentive to bring the industry in house. It means we’re far less vulnerable to the war of militias in Libya, the civil war in Iraq, a sanctions war with Russia, or worse.
Martin: People are asking: With all these oil wars overseas, why aren’t oil prices already rising?
Mike: If it gets a lot worse, they will. But my argument is they don’t have to. They could even go down and you could still make a fortune, just as we saw this week when crude oil prices fell but MLPs like Sunoco Logistics surged.
Martin: If an investor is first getting into this area, would you still recommend it right now?
Mike: I rarely recommend chasing a stock that’s already surging, and this is no exception. But there are going to be plenty of new buying opportunities for this MLP and others in the weeks ahead. So stay alert for the next major buying opportunities. In the meantime, if you want to start with a small stake, you can consider diversified ETFs in this area such as the JPMorgan Alerian MLP ETN (AMJ) and the Alerian MLP ETF (AMLP).
Martin: Thanks, Mike! Keep up the good work!
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