Oil stocks in a recession

• One thing to keep in mind...
• The pirate premium
• A 10.8% dividend

Yesterday I discussed the overwhelming importance of oil and its implications for your investments.

My most important advice in yesterday's issue was buried down at the bottom, so you might have missed it. Here it is to recap:

"if I can leave you with one thing to keep in mind, it's to remember the importance of oil - even for non-commodity investments. You need to look at all of your investments, from stocks even down to bonds and savings accounts, and think about how oil price fluctuations could affect the bottom line of the underlying assets and businesses you're invested in."

I also promised that I would look into some specific oil investments to buy under the assumption that the recession has resumed or is on the horizon.

During a recession, oil prices tend to sag due to decreased demand for oil, which doesn't usually bode well for most types of oil companies.

Sure, a company like Exxon (NYSE: XOM) is hedged 20 different ways for just about every market climate, so they won't get too shellacked during a sustained recession. But I've banged the gavel enough on Exxon, and if you're not convinced to own it yet, there's not really much more I can say. Okay, one more thing: Exxon is still cheaper than it was during anytime in 2009.

Moving on to slightly different, and just about as green pastures, I've long admired the business structure of oil shipper companies.

These companies typically negotiate a set rate dependent upon a variety of factors largely independent of oil prices. So, while they might have to contend with weather, pirates, port fees, licensing and a variety of maritime laws, they're usually compensated on the basis of largely predetermined factors within those categories. What they don't have to worry about as much is the price of their cargo.

Let me give a quick example of what I'm talking about.

You might remember last year when Somali pirates were making big news for capturing ships in and around the Gulf of Aden.

The Gulf of Aden is a choke-point for all shipping traffic back and forth between the Mediterranean Sea to East Africa, India, many parts of Asia, and Australia.

Here's a map that shows the proximity of the shipping lanes to Somalia:

Companies shipping goods through this area were basically paid a "pirate premium" for the excess risk involved in doing business through the Gulf of Aden.

That premium has nothing to do with the price of the goods on board, it's a straight multiplier determined by shipping authorities.

One such company Nordic American Tanker (NYSE: NAT) had some of the newest, fastest, most pirate proof ships in that area, so even though there was little chance they'd get nabbed, they still collected the premium.

And shares of NAT did quite well during the height of pirate paranoia in March-June 2009.

Shares appreciated 50% in two months.

Companies like NAT can benefit, even while the price of oil is falling or stagnant - because even if we're in a bad recession, we're still going to use plenty of oil.

I wouldn't suggest buying NAT today - but another oil shipping company has caught my eye: Teekay Tankers (NYSE: TNK).

I like this company as a recession play for two reasons:

About half of its ships are under pre-negotiated shipping contracts, so it has a bit of a built in safety-net.

It pays a large dividend, and has done so for the entire history of its company. Today TNK pays a 10.8% dividend, which is the kind of income that will make it easier to ignore daily price fluctuations.

If you've been looking for a way to invest in oil, and protect yourself from a recession, then this oil services income play might be a good place to look.

Good investing,

Kevin McElroy

Editor

Resource Prospector

disclosure: no positions