Consider This Model Energy Portfolio

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Energy is essential to human existence — consequently, companies that provide people with energy are going to be profitable. If they aren’t, then energy companies will go out of business and people won’t have the energy they need to live their lives. Therefore I think energy should be a key part of every investment portfolio.

There are innumerable ways for people to invest in energy, and there is no silver-bullet energy investment. Therefore, I think investors should add a few energy holdings to their portfolios.

The portfolio of three stocks that I offer here diversifies across different kinds of energy but it is relatively conservative. It is also designed to generate some income. Given that there are so many energy-related equities, this is just one approach to the sector.

With each investment idea, I also provide investors with an alternative holding that is geared toward more aggressive investors. These are more volatile investments that are more leveraged to the underlying commodity. Investors who don’t like wide swings in their portfolios should stick to the more conservative option. Investors who don’t mind gambling a bit are encouraged to look at the latter options.

1. ConocoPhillips (NYSE:COP)

ConocoPhillips is one of the largest exploration and production companies in the oil and gas sector. Since spinning off its refining business, the stock has significantly outperformed the larger integrated oil producers. Still, it trades at just over 10 times earnings and it pays a nearly 4 percent dividend yield.

The company plans on growing its oil and gas production by about 3-5 percent per year over the next several years. This should bode extremely well for the stock, assuming oil and gas prices remain strong. Furthermore the company has a lot of exploration potential, and this can add to its anticipated production growth. It is aggressively exploring its property in the Bakken oil field region in North Dakota, and it is also drilling for oil off the coast of Senegal.

The company isn’t going to make you rich, but it will offer low-risk exposure to the oil and gas space. While many environmental groups are concerned about climate change and the greenhouse gas emissions that come from burning oil and gas, these fuels aren’t going to disappear overnight. They are moving up in price in the long term because demand for energy is increasing, particularly in developing countries. Thus, ConocoPhilips should be a strong long-term holding.

More aggressive investors should consider taking a position in EOG Resources (NYSE:EOG). This is a smaller company with rapid growth, particularly in the Eagle Ford shale region in Texas. As I write this, the stock is trading at an all-time high, and so investors might want to wait for a correction. Still, the company is growing its production rapidly and trades at 20 times expected 2014 earnings, and this makes the shares inexpensive if the company can continue growing.

2. Alliance Resource Partners (NASDAQ:ARLP)

The coal space has been a terrible place to put your money over the past few years. However, prices of thermal coal have been strengthening lately, and coal producers should benefit. I think that investors should consider taking a position in a company that substantially outperformed its peers, like Alliance Resource Partners. This company is trading near its all-time high at about $85 per share.

The reason for this is that the company has been able to grow production, and it has extremely low costs. Therefore profits have remained strong, even if they have declined somewhat. Despite this strength, the shares trade at less than 12 times earnings, and they are poised to trade higher.

The company pays a large dividend. Looking at payouts over the past year, the yield comes to 5.6 percent, but the company has been devoted to raising its dividend on a quarterly basis. The dividend has been large, yet small enough so that management has been able to continue raising the dividend at a fast pace even in the face of a weak coal market. I expect that this dividend will continue to move higher, and this makes Alliance Resource Partners an excellent stock for retirees.

More aggressive investors should consider shares of Yanzhou Coal Mining (NYSE:YZC). This is a Chinese coal mining company that has been growing its production extremely rapidly. Despite the fall in coal prices, Yanzhou has been able to increase is revenue. Unfortunately, low coal prices means that it is losing money. This is bad, but it has sent the stock from $40 per share down to just $7 per share, and the stock seems to have found a bottom.

If coal prices rise, the company’s shares can skyrocket, considering that it trades at less than half of its revenues. However, if coal prices don’t rise, the company will continue to lose money, and it has a lot of debt that can seriously damage the company’s value. This is why the stock is meant for aggressive investors.

3. Cameco (NYSE:CCJ)

My favorite energy investment is uranium and nuclear energy. Nuclear energy is often misunderstood, as it is associated with the most devastating weapon ever deployed — the atomic bomb — and it is associated with radioactive pollutants. But properly regulated nuclear power plants are efficient and safe energy producers. As a result, countries throughout the world are increasing their capacity for generating nuclear energy, and in doing so, they are demanding more uranium.

Despite this, most uranium producers cannot make money with the spot uranium price at $34 per pound. This makes uranium mining somewhat risky, but at the same time, it means that uranium prices will almost certainly rise. The time to get in is now, with prices depressed.

The one uranium miner that is comfortably profitable is a Canadian company called Cameco. Cameco shares have corrected more than 50 percent since their 2007 peak, but they seem to have found a bottom and are currently consolidating in the low- to mid-$20 range.

The company operates the enormous and highly profitable McArthur mine in Canada. It has unusually high uranium grades, which means that while most of its peers are losing money, Cameco is comfortably profitable and paying a 1.5 percent dividend. As uranium prices rise, Cameco’s profits will soar, and so will the stock. If the uranium price remains weak, the company will remain profitable. Therefore, risk-averse investors who see the potential in the uranium market should stick with Cameco.

Investors looking for more upside in uranium have to go much farther out on the risk curve than investors in oil, gas, and coal.  One option that I particularly like is a small company called Energy Fuels (AMEX:UUUU). Energy Fuels’ stock is down an incredible 95 percent from is 2007 peak. The reason for this is that most of the company’s mines will not be able to generate a profit until the uranium price rises to $50 per pound or higher. Nevertheless, the company’s production will dramatically increase if this occurs, and given future demand for uranium, I expect that we will almost certainly see $50 per pound and higher.

Another reason to like Energy Fuels is the fact that its White Mesa uranium mill is the only licensed uranium mill in the United States. Considering that there are a lot of exploration projects in the U. S., Energy Fuels will not just profit from producing its own uranium, but other companies will use Energy Fuels’ mill to process their ore. This means that Energy Fuels has a unique competitive advantage over its peers. While it is not profitable now, I suspect that it will be in the future, and it is among the best small energy investments around.

Disclosure: Ben Kramer-Miller is long Alliance Resource Partners, Cameco, and Energy Fuels.

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