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Neil George
Neil George
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Oil isn't the only interest play in the oil patch. Below we continue to recommend you buy and hold the best companies in oil, nuclear and gas.

By now we've all made a killing in our oil stocks. From the tried and true global biggies to the wildcat drillers, the past few years have been good to the petrol patch.

But that won't always be the case. Oil and gas prices will slip and slide just like they've done before. And we'll all have to stay sharp and not get too comfy holding the same old stocks.

Instead, we have to find companies that will be there for us during the next few years, even as petrol prices retrace their bold move upward.

Energy is more than just oil. While you need to own the best in the oil and gas markets, there are plenty of Steady Eddie businesses downstream including transporters and refiners that are worth your investment dollars.

And beyond the purveyors of petrol derivatives, energy also means power generators including the next wave of new generation of power—nukes. They're coming back as one of the cleaner and potentially cheaper alternatives to coal and other fossil fuels.

Inside the Personal Finance model portfolios, we've been assembling some profitable picks for growth combined with bigger dividends in the energy markets. But as a primer for veteran subscribers as well as newcomers, we're highlighting the best in each energy sector to give you a starting point to build, remodel or enhance your portfolios.

Fossil Finds

We start where we took off a few years ago with our real fossil finds in the Great White North, on the plains of Alberta, Canada. Canada is home to our favorite fossil fuel firms because the nation enabled oil and gas companies to incorporate as trusts.

These energy trusts generate revenue by pumping the stuff out of the ground. They then paying the expenses of the operation including management's contracts, servicing the debt, setting aside around 15 percent for reinvestment and expansion--and paying the rest to us, without the double-taxation of traditional corporate tax levies.

Not all of these are alike and since we're focused on making money even if petrol prices plunge, our core recommendation for all to buy and hold first is ARC Energy--the one with years of reserves, cheap production costs and a conservative payout.

And with a payout rate that's deeply discounted from historical operating revenues, along with a hefty program of locking in prices for long periods of time, ARC is the one Canadian that will be standing even if oil price crater. ARC Energy a buy up to 17.

Big integrated oils don't offer dividends as high as the Canadian trusts, but with billions in the bank, downstream deals in refining and immense assets in the ground, they're the steadiest stocks to own.

Rising energy prices have enriched the big oils. But production costs are rising, replacing reserves is more challenging and industry margins are tightening. However, Income Portfolio member BP just posted a 39 percent profit boost thanks to its expanding global deals, including Russia.

BP will depend on Russia keeping its output rising. But even with political challenges, the worst case still leaves BP with a wealth of other projects around the world.

Refining operations enjoyed a 54 percent profit boost in the first quarter. And despite an accident at its Texas City refinery bringing liability, its dealings with the tragedy should still leave it in good shape in the quarters to come. With gas, power and even renewables aiding a AA+ rating, BP is a solid buy up to 60.

Pumped Premiums

"Demand for refineries" is almost a threadbare phrase from Wall Street types, making refiners not so cheap. One exception is Giant Industries, which owns facilities on both coasts and gets revenues from a portfolio of direct outlets.

Giant's first quarter earnings surged 60 percent, continuing its trend with refining operations' 22 percent jump in operating income. That's enabling big debt reduction, slashing interest expense 25 percent. No dividend yet, but at under 1.5 times book, Giant is a buy to 28.

Beyond refining, it's getting the downstream stuff to market that makes up another core segment you need to own. Two Income Portfolio pipelines are there for your choosing.

First is TEPPCO Partners, which operates a network pipes, longer-range transportation, storage and processing facilities. TEPPCO posted a 20 percent income increase for the first quarter due to increased volumes of refined products including propane, as well as higher gas gathering.

The trend should continue with cash-accretive acquisitions, including crude storage and pipeline assets in Texas and Oklahoma meaning dividend growth. Buy TEPPCO up to 42.

Second is NiSource with its Columbia Gas Pipeline stretching from New England to the Midwest on top of its multi-state gas utilities. NiSource's challenge has been to slash debt from the takeover of Columbia in 2000.

It was forced to trim its dividend. But shorn of riskier operations from that deal and debt slashed to half of total capital, dividends are good to grow. It's also the cheapest pipeline with shares priced at 1.3 times book making it a potential takeover target. Yielding around 4 percent, NiSource is a buy to 23.

Pipes can only get petrol so far. And since much of the world's oil comes from overseas, it also takes tankers. These stocks have huge payouts but they're fairly volatile—stick to the best.

Our top pick is the savvy but smallish Knightsbridge. The company is simple: It owns five double-hulled very large tankers. Three are locked into solid profitable contracts and two are positioned to capture gains in spot market, boosting monthly revenues.

Yes, there's risk, but like our Canadian Trusts Knightsbridge has a simple, low-cost operation that will keep paying double-digit yields for years, Knightsbridge is a buy below 45.

Fusion Fortunes

In the 1950s, nuke's proponents declared it would produce electricity too cheap to meter. Fifty years later, after soaring costs, accidents, massive writedowns, bankruptcies and finally a turnover of plant ownership; it's the ‘50s again for nukes.

One of the leaders is Income Portfolio member, Southern Company that operates four major southeastern plants. Geography is key as the Southeast never deregulated its utes.

Coupled with strong local government relations, Southern earned a $508 million rate hike in Georgia adding to a steady rate of near 5 percent revenue growth as the region expands, particularly in automobile manufacturing where Southern has a growing unit specializing in providing power to large users under long-term contracts.

The result is an A rating with expected 10 percent annual total returns over the long haul. Dividends are rising—currently around 4.2 percent--and should continue to grow. It's pricey, but Southern Company is a buy anytime under 32.

The direct nuke play is USEC, the supplier of fuel for nuclear plants. With no new US nukes coming on-line since the early 1990s, it's been a flat business for years. The result is that USEC is known for steady, big dividends.

The transfer of nuke ownership to a few veteran hands is dramatically improving plant performance. And with new regulatory approval increasing capacities, nuclear power's share of US electricity output is rising from high teens to low 20s, and plants slated for shutdown are gaining new lives.

All of this means boosted nuclear fuel demand that's nearly doubled USEC's gross margin from 8 to 15 percent in the first quarter. Those gains will multiply in coming years, with a new generation of plants being built nationwide. Buy USEC for yield and growth up to 14.

Those searching for a steadier play on nukes, as well as other rapidly growing infrastructure technologies, won't go wrong with Growth Portfolio denizen Siemens. Like rival GE, it has a mighty array of products and processes, as well as vast global reach. It's also set as a major player in the world's surest nuke growth market--Asia, particularly in China.

Unlike GE, Siemens is cheap at less than twice book and just 69 percent of sales. Also, it lacks GE's heavy exposure to financial services, which is a plus if there's a US economic downturn. Buy Siemens up to 78.

Neil George will be available to take your questions until Monday, June 13. Please use the form below to submit your questions.

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