Kodiak Oil & Gas Corp (USA) (KOG), Continental Resources, Inc. (CLR): Want to Invest in Oil? Know What You are Buying

Dividend hunters
Right now, Denbury Resources Inc. (NYSE:DNR)’s business model generates a load of free cash flow, and the company is investigating ways to return that excess cash to shareholders. On its recent conference call, management announced it was considering a conversion to a master limited partnership, which should make dividend-hungry investors salivate. In may ways, Denbury shares similar traits with other exploration and production MLPs like BreitBurn Energy Partners L.P. (NASDAQ:BBEP) and Linn Energy LLC (NASDAQ:LINE). What makes this route so attractive for investors is that these two companies have dividend yields of 10.9% and 12.5%, respectively.

Being a successful E&P MLP is a challenging route because it attempts to bring together two diametrically opposed forces. It needs to have steady cash flows to support a high-yielding distribution while operating in a capital-intensive environment with high commodity risk. To make these opposites attract, MLPs do two things: They focus on developed, mature, long-life wells that will generate cash for several years and hedge their oil and gas production to lock in prices. That hedging strategy can backfire, though, as Linn is currently under an informal investigation from the SEC regarding its hedging strategy.

What a Fool believes
The investment options in the E&P business are just as diverse as the entire energy space, and each one can serve a purpose in an investor’s portfolio. The one thing that shouldn’t change, though, is your approach to investing: Focus on the long term and do your homework. These tactics will help you be successful no matter what industry you choose.

The article Want to Invest in Oil? Know What You are Buying originally appeared on Fool.com and is written by Tyler Crowe.

Fool contributor Tyler Crowe owns shares of Linn Energy. You can follow him at Fool.com under the handle TMFDirtyBird, on Google +, or on Twitter @TylerCroweFool.The Motley Fool recommends BreitBurn Energy Partners and owns shares of Denbury Resources. 

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