Posted By RichC on July 22, 2014
After my recent visit to North Dakota and the oil fields … AND seeing what has happened in one short year, I talked with my son ways of trying to invest in this oil boom (the “invest in what you know” philosophy). Of course I tried to look at what he sees from a “planners” perspective, but the more I looked for ideas, it sort of felt like I was late to the game. The Bakken boom is far from over when it comes to oil, but it is more challenging to find right way to invest in this American boom. Currently the players are companies like Continental Resources ($CLR), Kodiak Oil and Gas ($KOG) or Whiting Petroleum ($WLL) — the last two will become one. I also discussed the safer (?) Warren Buffett’s Berkshire Hathaway play ($BRK.B) since so much of the 1 million barrels of oil per day (new record for North Dakota) are moved on the expanding Burlington Northern Santa Fe Railways.
Then there’s the real estate angle where single bedroom apartments rent for over $2000 per month and even modular homes sell for $250,000. You’d be hard pressed to find a nice “small” city lot home for $300,000 in Williston. I even saw in-town older homes on a postage stamp listed for nearly a half million dollars! Maybe real estate?
On the other hand, a hands-off North Dakota Master Limited Partnership with “decent” management might be the way to invest … although I suspect in this “wild west” big money boom one could get bitten?
As an investor, I’ve owned a few shares of $KMP for a couple years (one of the largest pipeline MLPs), but for the most part this is more of an income stream than a speculative high growth company. Still, with one of the few favorable tax treatment investments available to the ordinary investor and there aren’t many other industries able save on corporate taxes low and pass the income to shareholders (except Inversions). From my reading, this special MLP structure came from the 1986 tax code which was purposed to explore, develop, mine, produce, process, refine, transport and market minerals and resources here in the U.S. Not many industries receive this generous tax structure … which offers the ability for the organization to send more of its profit to shareholders rather than the IRS. Over the years, this so-called “loophole” has enable the Master Limited Partnership to pass revenue through to investors of American energy who receive dividend checks somewhat larger than companies who pay high U.S. corporate taxes. This might be particularly helpful for those saving outside a tax sheltered IRAs and 401Ks or attempting to supplement income with a quarterly check. It’s obviously attractive in today’s low interest environment where neither bonds or cd can meet investment targets. If oil remain “in demand” and trades consistently around $100/barrel, a well managed MLP should be able to return a conservative 7% for years to come.