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Energy Plays: How to Profit From the Oil-Price Boom

Topics:Stock Market

Sectors:Oil and Gas

By: Jeff Cox, , Special to CNBC.com | 18 Jun 2008 | 02:59 PM ET

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The seemingly endless surge in energy prices is lightening wallets at gas stations everywhere. But it's also a potential bonanza for investors who have a multitude of ways to play the astonishing bull market run.

CNBC

As analysts continue to debate whether there's an energy bubble, market pros aren't wasting their time. Instead, they're focusing on how to profit from the trend.

"There are so many excellent ways to play the energy market," says Jordan Kimmel, a hedge fund and mutual fund manager at Magnet Investment Group in Randolph, N.J. "Everyone keeps looking over their shoulder to figure out where the top of the market is going to be and not recognizing how deep this global explosion is. This is not a supply interruption increase, this is really demand-driven."

To be sure, there are plenty of risks in the strategy. Should the oil boom suddenly go bust that would spell trouble for a variety of investments. At the same time, if prices continue to rise that also would put pressure on major producers, as would the potential of windfall profits taxes that Congress continues to discuss.

As such, Kimmel is playing the energy market with diversification though a number of angles: Pipeline builders, natural gas suppliers and even alternative energy. Exploration companies have been popular among money managers, and President Bush's announcement Wednesday that he will encourage Congress to reverse a ban on offshore drilling likely will boost the industry.

Kimmel's plays include pipeline companies BP Prudhoe Bay Royalty Trust [BPT Loading... () ] and Persian Basin Royalty Trust [PBT Loading... () ]. Both pay solid dividends and, because they are focused on transporting fuel, are not subject to price fluctuations.

Cramer's Investor Takeaway

In natural gas, Kimmel recommends Contango Oil & Gas [MCF Loading... () ] and Warren Resources [WRES Loading... () ]. His top alternative energy play is Canadian Solar [CSIQ Loading... () ].

"Every guy's out there looking for the guy who's going to call the top," Kimmel says. "That's definitely not going to be me, and it's not going to be here."

Big Oil or No Big Oil?

Some investment advisors are staying away from the oil majors on the thinking that prices are too volatile and a big surge can have a negative impact on the major producers.

But Peter Miralles, president of Atlanta Wealth Consultants, is playing the entire sector and isn't afraid of stalwarts like BP [BP Loading... () ] and ConocoPhillips [COP Loading... () ].

"It's the same theme we've been on before--pretty much anything in energy. With prices where they are, they're going to continue to make a lot of money," Miralles says. "A 10 percent correction is nothing in the commodity area."

RELATED LINKS

Elsewhere in the sector, Miralles likes companies that make the machinery and equipment used in petroleum, including National Oilwell [NOV Loading... () ], FMC Technologies [FTI Loading... () ] and Weatherford International [WFT Loading... () ].

He also is in coal, with recommendations for CONSOL Energy [CNX Loading... () ] and Massey Energy [MEE Loading... () ].

Natural gas also has the attention of John Massey, portfolio manager at AIG SunAmerica Asset Management, who believes a high trading ratio compared to gas, a warm summer trend and the possibility of a severe hurricane season as bullish factors.

In that industry he likes Ultra Petroleum [UPL Loading... () ], a company based in the Rocky Mountains that will benefit from the construction of a new pipeline that will greatly help with distribution.

Generally in energy, he recommends Schlumberger [SLB Loading... () ] for its big international base and ability to get into countries like Russia and Venezuela, which are more difficult places for US-owned companies.

And he says Cameron International [CAM Loading... () ] is a strong company for playing offshore and deep water drilling.

CONTINUED : ETFS Play the Trend But Limit Exposure

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