A Different Kind of Alternative-Energy Portfolio

With energy stocks riding high on strong oil prices, many investors are looking for ways to increase their exposure to the energy sector. They could turn to a fund such as Fidelity's Select Energy and pick up the usual names in the fund's top 10 holdings: integrated oil companies such as Chevron and ConocoPhillips, refiner Valero (NYSE:VLO), oil-services giant Schlumberger, and exploration companies including Ultra Petroleum (NYSE:UPL) and Inside Value pick Chesapeake Energy (NYSE:CHK).

Meanwhile, others opt for second-tier mid-cap exploration names, or the Wild West frontier of micro-cap startups looking for oil in odd parts of the globe.

I made energy the largest single sector in my portfolio in late 2004, and it has subsequently represented between 20% to 35% of my total holdings. I held a lot of exploration names and made good money, but many of the charts turned sideways in 2006 and never broke out of their trading ranges. After watching the same stocks move up and down endlessly, I began to move my energy dollars to alternative names.

No, I didn't go for unprofitable fuel-cell startups such as Ballard Power (NASDAQ:BLDP), or the new ethanol plays. I like my stocks dripping with cash flow and profit growth. But I've found other ways to invest in the energy sector while getting steadier charts than the usual suspects offer. Here's a list of lesser-known energy names I own that you might want to consider for your own portfolio.

Invest in picks and shovels ...
With oil companies raking in so much dough, a lot of the profit will be plowed back into new exploration. That means drilling equipment is always in demand. Singapore's offshore-drilling platform manufacturer Keppel has gone up fourfold in the past few years, but its full order book through 2009 guarantees strong cash flow and profits. Elsewhere, U.K.-based Hunting PLC serves the drillers in oil-rich Alberta with well services and trucks.

... Or wagons
The guy who started a Conestoga wagon factory when the first explorers headed west had the right idea. Today's equivalent of "prairie schooners" are oil tankers, like the modern double-hull fleet run by Tsakos Energy Navigation. When Tsakos was busy ordering new tankers in 2003, ahead of an international mandate to retire all single-hull tankers, no one wanted the stock at $11. Now trading at roughly $56 a share, Tsakos sports strong earnings growth, a low P/E, and a fat 5.4% dividend yield.

The other lucrative niche in energy transportation is pipelines. Whatever happens to spot oil and gas prices, the physical product always has to move from suppliers to refiners to end users. Pick one of several good pipeline partnerships, or buy a basket with the Energy and Income Growth Fund.

Global Gains pick Sasol (NYSE:SSL) is a variation on the transport plays; its gas-to-liquids (GTL) and coal-to-liquids (CTL) technologies offer a way to get "stranded" natural gas and coal to markets with high demand. The company also has steady cash flow as the largest refiner in South Africa's booming emerging market.

The other producers
Energy comes in more forms than basic crude oil and natural gas. Just about anyone who looks at long-term supply-and-demand trends (not to mention global warming) realizes that nuclear energy will have to be a larger part of our future. France's state-owned nuclear giant Areva is the best pure play on the nuclear future, with operations up and down the nuclear chain, from uranium enrichment to building and operating reactors worldwide. Only a small percentage of Areva's shares trade publicly.

Hydroelectric power is another important energy provider. Brookfield Asset Management (NYSE:BAM) owns one of the best public portfolios of hydroelectric assets in North America. It also has a thriving commercial real estate portfolio and, dare I say it, asset allocators who could stand on the same stage with Warren Buffett.

With peak oil approaching (or maybe even past, depending on whom you talk to), everyone knows that Canada's oil sands reserves might be another staple supply for thirsty American cars this century. You can invest in several big names in the oil sands, from the Canadian Oil Sands Trust to Suncor, ECA, Nexen, and others. I bought a few speculative shares in Connacher Oil when it still traded for less than a buck, based on its large acreage in the oil sands region. If Connacher's development plans proceed on schedule over the next few years, it could be worth a lot more as a steady producer.

Let's not forget coal. U.S. coal producers had a big run last year, but I turned to China Shenhua Energy, one of the country's largest producers, and the only one with its own railroad to get its coal to market in China's booming economy.

Finally, I placed a small bet on U.S. merchant power producer Dynegy as a turnaround play from the ashes of the independent power market blow-up. Ditto for BZP Energy, a Peruvian natural-gas explorer with rich offshore fields that will supply a new generation of power plants in Peru once they come online next year.

Never stop looking
If you stick to the usual suspects and the large-cap energy funds, your performance should mirror the ups and downs in the sector. But adding some names from off the beaten path could smooth out your performance with steady gains.

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Fool contributor Dale Baker, a private client portfolio manager and former U.S. diplomat with extensive experience in Europe and Africa, owns shares in all of the energy portfolio stocks for himself and his clients. He welcomes your questions or comments. The Motley Fool has a disclosure policy.