How to Play the Bakken Oil Boom While Oil & Gas Companies Are at Their Highs

by Profit Confidential
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Submitted by Profit Confidential as part of our contributors program

When scanning the stock market for new opportunities, I’m always looking for spinoffs that are potential investments or trades in industries or related to specific sectors that are considered “hot.”

The problem with “hot” sectors or specific stocks themselves is that they are typically expensive. A burgeoning stock market sector like Bakken oil offers liquidity and opportunity, but because many of these stocks are “in demand,” or highly visible to institutional investors, share prices can be way out of whack with reality. That’s why a spinoff industry that’s benefitting from the Bakken oil production boom can actually be an even better investment opportunity.

Long-time readers of this column know of my affinity for railroad stocks as long-term investments. The two I like specifically are Union Pacific Corporation (UNP) and Canadian National Railway Company (CNI); according to their trading history on the stock market, they’ve been worth accumulating when they’re down.

But having travelled through the Bakken oil region and put eyes on the infrastructure and the activity surrounding it, railroad services seemingly offer good growth potential—especially now with pipeline capacity unable to keep up with the amount of oil coming out of the ground.

The business of railcars and railroad services has been around a very long time. Four companies worthy of investigation are American Railcar Industries, Inc. (ARII), The Greenbrier Companies, Inc. (GBX), FreightCar America, Inc. (RAIL), and Trinity Industries, Inc. (TRN).

Many of these companies have been in business a long time, but with railroad companies doing well and demand for petroleum railcars soaring, many of these mature businesses are experiencing solid growth in revenues and earnings. They are worth looking into if you are interested in spinoff investments related to the Bakken oil boom and in other domestic oil regions.

The oil and gas equipment and services area is dominated by the big players, and Wall Street is continuously boosting earnings expectations among most corporations within the group.

Back in April in this column, we considered Chart Industries, Inc. (GTLS), out of Garfield, OH, which is a company in the natural and industrial gas storage business. Bakken oil isn’t the only area benefitting from horizontal drilling and fracturing. The natural gas build out is an investment theme that I’m particularly fond of, and a company like Chart Industries is a great spinoff to play this investment theme. (See “This Is an Investment Theme Worth Paying Attention To.”)

Many Bakken oil companies are experiencing substantial production growth right now, and their shares are richly priced. This is why spinoff opportunities are so valuable as an equity investor. You get the same benefit of the economic activity taking place, with less risk as an operator and typically lower prices as an investor.

The Bakken oil boom certainly has a shelf life and, as is the case in the investment business, timing is everything.

Railroad stocks are fully valued and trading right close to their all-time record highs. But several railroad services companies are not, and I feel they now make for attractive opportunities. As the boom matures, it’s the spinoff trades that are the better investments.

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