Energy Portfolio Adjustments for a Volatile Market

Investors should consider energy stocks that aren't affected by the underlying commodities but cheap for the wrong reasons.
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NEW YORK (TheStreet) -- Wild volatility is back in these markets, and investors are wondering where to run for cover. There are definitely some moves you should be looking to make in the energy part of your portfolio, to keep you safe as well as take advantage of the opportunity, not be a victim of it.

In various articles, I have outlined the important subsectors of energy stocks that I believe every investor needs to have exposure to. What I haven't done is made iron clad rules on the allocation percentages that you should apply depending on the levels and volatility of the underlying market. In a market as wildly violent as this one has recently become (and I predict will remain!), I think it's important to play a little more defense.

I have recommended owning five subsectors of energy stocks: multi-national integrateds, oil services, refining, natural gas and transport and storage MLP's. Each of these subsectors has a very different trading profile: Some will act more like solid utilities, while others will ratchet up and down violently in high-beta, speculative-like moves. Protecting your investment portfolio is dependent on correctly adjusting your exposure to each of these as the market changes.

On the 'safer' side of energy investments, the energy storage and transport Master Limited Partnerships can work as the "utility"-type piece of your energy portfolio. And the opportunities in these can become golden, particularly when the market swoons.

Let's take a look at one, a good benchmark for the sector:

Enbridge Energy Partners


. Enbridge is a transport MLP, meaning that it merely owns pipelines and tanks and leases the use of them.

Most of the scheduling for these leases and the crude oil and natural gas that flow through them is done months and sometimes years in advance. The payment schedules are consistent and for the most part, only a long-term change in the usage patterns for petroleum in the Gulf coast could affect Enbridge's margins.

This is a long way of saying that the distributions of most MLP's are rock solid and definitely not affected by the underlying price of either the crude oil or natural gas that they transport. This doesn't stop those stocks from reacting to the quick changes in the price of crude. When crude dives, so do the prices of these shares. And that is where your opportunity lies.

These are the kinds of stocks you should be looking to buy when the market swoons -- stocks ultimately unaffected by the price of the underlying commodities but being priced cheaply for all the wrong reasons. These are defensive stocks and I put in buy orders based solely on the dividend (distribution) that each price would deliver. We saw levels in 2008 where distributions were in the low teens -- a lifetime opportunity we won't see again. Nowadays, I look for distributions of at least 8% to initiate positions.

In the downdraft we just saw culminating on last Thursday, you could have bought EEP at a price that delivered a 9% distribution -- quite a good value. Other stocks of this type to look at include

Kinder Morgan Energy Partners



TransMontaigne Partners



On the other side, there are high-beta energy stocks to be lightening up on as the market rallies, like it has in the past two days. In energy, the highest beta stocks are the ones most closely correlated to the price of the underlying commodity -- NOT the integrated stocks, as you might think, but instead the natural gas stocks. These will make big moves up and down and can cause you great anxiety as well as lose you quite a bit of money in the large downdrafts that this kind of volatility naturally brings.

Have a quick look at


(DVN) - Get Report

for example: It has had a quick move back and forth of more than 8%, moving from 68 to 63 and back again.

Even more volatile has been a smaller cap natural gas name like


(SD) - Get Report

, which moved more than 16%, or

Gastar Exploration


, with almost a 30% move. These are the stocks that you will lose sleep over when things get wild. The best move is to lighten up on these on big market rallies and slowly wade into them only when the market has a big drop day.

These are some simple ways to adjust -- not mutilate -- your portfolio to stay ahead of the volatility that continues to mount. This is not the time to give up and just get out of your stocks; this market has proven over and over that taking some risk can pay great dividends. But adjustments in allocations can really help maximize the safety of your portfolio while minimizing those risks.

More Energy Investment Ideas

Energy ETFs, Stocks With High Yields

At the time of publication, Dicker was long Devon and TransMontaigne Partners.

Dan Dicker has been a floor trader at the New York Mercantile Exchange with more than 20 years' experience. He is a licensed commodities trade adviser. Dan's recognized energy market expertise includes active trading in crude oil, natural gas, unleaded gasoline and heating oil futures contracts; fundamental analysis including supply and demand statistics (DOE, EIA), CFTC trade reportage, volume and open interest; technical analysis including trend analysis, stochastics, Bollinger Bands, Elliot Wave theory, bar and tick charting and Japanese candlesticks; and trading expertise in outright, intermarket and intramarket spreads and cracks.

Dan also designed and supervised the introduction of the new Nymex PJM electricity futures contract, launched in April 2003, which cleared more than 600,000 contracts last year alone. Its launch has been the basis of Nymex's resurgence in the clearing of power market contracts over the last three years.

Dan Dicker has appeared as an energy analyst since 2002 with all the major financial news networks. He has lent his expertise in hundreds of live radio and television broadcasts as an analyst of the oil markets on CNBC, Bloomberg US and UK and CNNfn. Dan is the author of many energy articles published in Nymex and other trade journals.

Dan obtained a bachelor of arts degree from the State University of New York at Stony Brook in 1982.