The Only Way to Play Energy Now

And when it does, millions of us will look back on the past year longingly. Meanwhile, a handful of us will look back triumphantly ...

$5 gas, here we come -- again!
That's right, I said it ... despite
a shaky economy and despite the Obama administration's likely crackdown
on speculators the Commodity Futures Trading Commission now blames for
2008's historic run-up.

Because let's face it -- over the long haul, demand for oil and gas
will drastically outstrip supply. And the majority of that supply is
controlled by a handful of obscenely wealthy foreign businessmen who,
as old T. Boone Pickens points out, don't like us very much.

Point being, oil and gas prices will eventually recover --
and then soar to new highs. When they do, everyone's going to get
pinched at the pump -- yet only a few will get rich.

Will you be one of them?

Frankly, that all depends on what you do right now. I've been loading up on specialty deepwater drillers like Transocean and looking to other lesser-known drillers like Noble Corp. (NYSE: NE) and Pride International (NYSE: PDE). I've even picked up shares of the Energy Select SPDR, which counts oil and gas companies like Devon Energy (NYSE: DVN), Occidental Petroleum (NYSE: OXY), and XTO Energy (NYSE: XTO) among its top holdings and pays a decent 1.8% dividend.

I've also had my eye on smaller, specialty energy players like seismic data acquisition companies Dawson Geophysical and even tiny TGC Industries.
They're both swimming in cash, trading near historically low multiples,
and well-positioned to shoot higher when the price of oil and gas
finally rises. Of course, there's only one problem.

You don't want to wait forever to cash in, do you?

Neither do I. So I sat down with our in-house dividends expert, James Early, to ask him about the other way to play energy.

No, I'm not referring to dividend-paying oil-services companies like Halliburton, Schlumberger, or National-Oilwell Varco (NYSE: NOV).
Instead, I'm talking about a group of often-overlooked energy
investments that make big money regardless of the price of oil -- and pay you big bucks to own them.

The only way to play energy now

You may already know that I'm talking about master limited partnerships (MLPs), but in case you don't, here's a quick rundown.

MLPs were born out of two Reagan-era tax reforms instituted to spur
the development of U.S. energy infrastructure. Consequently, nearly all
MLPs are involved in the transportation, storage, refining, or
processing of oil and gas.

Yet MLPs charge by the volume of oil or gas they transport,
refine, etc., so fluctuations in the price of the commodities have only
a minimal effect on their earnings. And because they're organized as
partnerships, they're not taxed on the entity level -- which, for
reasons I'll explain in a moment, provides investors a huge tax
advantage.

It also means that by law, they have to pay out the great majority
of their earnings to their investors -- hence their ultrahigh yields
(typically from 6% to 10%).

You can buy MLPs online or through your broker, and they trade on
major exchanges right along with regular dividend-paying stocks -- the
one exception being that instead of shares, you purchase units, making
you a unitholder, rather than a shareholder.

"For investors who want a lot of payout without a ton of risk"

That's how James Early describes these investments in the comprehensive MLP guide he recently put together for members of our Motley Fool Income Investor community.

One of the MLPs he's recommending is Magellan Midstream Partners (NYSE: MMP). Though lesser-known than Kinder Morgan Energy Partners,
Magellan actually operates the longest oil and gas pipeline in the U.S.
-- a huge advantage when you consider that it more or less runs an oil
and gas toll road.

Magellan is also flush with cash, and since going public in February
2001, it has increased or maintained its quarterly payout (called a
"distribution" in MLP land) for 33 consecutive quarters.
Granted, it has already shot up 68% since James recommended it last
November -- but he still thinks it has plenty of room to run, and it
pays a juicy 7.4%.

More good news

Because MLPs aren't taxed on the corporate level, you won't have to pay taxes on the majority of the cash you earn until after you sell the units, making it a great way to earn tax-deferred income.

In short, if you're looking for a way to cash in on energy right now,
I'd look no further than Magellan Midstream Partners. It's just one of
five MLPs, and more than 50 dividend-paying stocks, that James is
recommending to Income Investor members.

© 2009 UCLICK, L.L.C.