The 2 Commodities That Can Offer You Perpetual Income

Commodity companies have been making a fortune for their shareholders for years.
But what few investors realize is that the best way to profit from the ongoing commodity boom isn't the obvious one – of buying companies that produce or own the natural resources.
Rather, there are several "backdoor" commodity plays that I believe will be much more profitable in the months and years ahead.
(A backdoor play is a way of participating in a popular investment idea that few other people have thought of. It's covert. It attracts scant attention. The "investing herd" has no idea it exists. But it's the absolute best way to invest in a hot idea.)
Today, I'm going to share two of them with you.
The two companies are perfect for income-seeking investors, because they provide a constant stream of cash in the form of hefty dividends. This means you can receive checks in the mail every quarter – or even every month – while you sit back and watch your invested capital grow.
So let's get started...

Opportunity #1:The Oil Sands Story No One Is Telling

Canada's oil sands make up a gargantuan oil deposit in the western province of Alberta.
Trapped beneath the frozen tundra lies seven times more oil than Saudi Arabia's proven reserves... enough oil to last us 4,896 years.
It's not as cheap to produce oil from the oil sands as it is to pump it from conventional deposits. But as long as the international price for crude oil is more than $40 a barrel, it's profitable.
With oil prices around $100 a barrel, business in the Canadian oil sands is absolutely booming. More than $125 billion has been committed to projects in the area. That's 19 times the total U.S. investment in the alternative energy sector.
Of course, this probably isn't news to you. The huge boom in the Canadian oil sands has been widely reported in the press.
And it has made some investors very rich. Big companies like Suncor and Petro-Canada are up more than 1,000% since 2000.
But instead of buying into the obvious investment story that everyone already understands, I've got something much more interesting to tell you about...

The Absolute Best Way to Playthe Oil Sands Boom

Not many people realize this, but it takes huge quantities of natural gas to produce oil from the oil sands. Steam is used to separate the oil from the sand after the workers have dug it up from the ground. And to make that steam, you need natural gas... a thousand cubic feet of natural gas for every barrel of oil processed.
In other words, the Canadian oil-sands industry consumes about 1.1 billion cubic feet of natural gas every day. Of all the gas consumed in Canada every day, more than half of it is used to turn bitumen – oil sand – into oil.
Canada's National Energy Board says, "Natural gas requirements for the oil sands industry are projected to increase to 2.1 billion cubic feet (bcf) per day in 2015."
Currently, the area produces one million barrels of oil a day. Experts believe oil production in the region will quadruple over the next 18 years. That means demand for natural gas will multiply, too... probably to around 3 billion cubic feet per day by 2025.
Here's the thing... Up until now, the major oil companies have either produced their own natural gas or bought it straight from the main pipelines running across Canada.
But sourcing your own is a major pain in the neck. For starters, you have to find it. And it's usually located in some desolate corner of the frozen Canadian tundra.
Then you have to compress it on location and bring it back home in pipelines that could be several hundred miles long. All this work requires lots of heavy equipment, which must be dragged around western Canada, where there aren't many roads and the weather conditions are awful.
Do you really think the major oil companies operating in the oil sands want this hassle? I don't, especially given their ambitious plans in the oil sands.
The answer? Hire a specialist gas provider and secure long-term supplies. That specialist is
AltaGas (TSX: ALA-UN), my first backdoor oil recommendation.
AltaGas is a natural-gas transportation business. It has a fleet of 74 skid-mounted gas plants and compressor stations that it drags around the Canadian countryside.
It also owns a 6,000-kilometer pipeline network that brings gas from the wellheads in the field to the oil companies in the oil sands. AltaGas never owns the gas – it simply collects a fee every time someone wants to use its equipment.

Heading Full Speed into aNatural Gas Supply Crunch

Some investors get nervous about natural gas. But it's important to remember that the natural gas market is cyclical.
Take the current situation, for example. In 2005, natural gas prices rocketed to $15 per thousand cubic feet (mcf) – an astronomical rise. That led to a flood of investment in natural gas projects. By early 2006, the price of natural gas declined, undercutting many of those projects.
But the investment boom left so much infrastructure in the field, it seemed Alberta would never need another oil company, gas well, or pumping station again. Abnormal supplies pushed down prices.
That's about to change. Soon the market will face a deficit, and the whole cycle will repeat itself. Depressed stocks will be highfliers again. We need to get into this trend before the herd...
It looks to me like we're charging headlong into a supply crunch in the natural gas market... and that makes me very bullish on the price of natural gas. In fact, the market is already showing signs of perking up:

In sum, I think there's a good chance natural gas may rise above $10/mcf in the next 24 months. Although AltaGas never actually owns the natural gas, it will profit when higher prices stimulate drillers and explorers to start looking for more gas. More driller activity means more business for AltaGas.
Since AltaGas started business in 1994, it has increased net income every single quarter. Last year, AltaGas brought in C$115 million in net revenue from its combined businesses and paid out C$110 million in dividends. It has never reduced its dividend. Currently, the monthly dividend is 17.5 cents per share – an 8.5% yield.

Action to take: Buy AltaGas (ALA-UN.TO) below C$30.

Buying Canadian stocks is easy – and no riskier than buying American stocks. All good discount brokers can trade them. The fee structure may vary from regular U.S. stocks, but there won't be a big difference. You can trade Canadian stocks online, too. Just call up you broker and ask him for the correct symbol.AltaGas' symbol is ALA-UN.TO. But that's its symbol in Toronto. If you're buying AltaGas through an American broker, he'll give you its U.S. symbol. For AltaGas, that will probably be ATGFF.

Opportunity #2:Oil Patch Banking

The second income-producing commodity-related opportunity I'm excited about is closer to home. It is a predictable money-lending operation that will generate 22% this year from the Texas oil patch... pay no tax... and distribute 95% of its profit back to shareholders.

The company is NGP Capital Resources Company (Nasdaq: NGPC).

NGPC is going to generate an 8% dividend – with an additional 15% jump in the share price by the end of 2007. Beyond 2007, its average annual returns should settle down to around 20%, with 6.5% coming to you in dividends and 13.5% in price appreciation.
How can I be so accurate with my forecast? Suffice it to say, money lending is a very stable, predictable business... as long as people want to borrow.
Houston-based NGPC specializes in energy-patch money lending. All it does is provide financing to very small businesses in the oil patch... These companies are almost always private, fast-growing, and desperate for cash.
NGPC's loans range in size between $10 million and $50 million, and terms vary. NGPC is not subject to many of the limitations that govern traditional lending institutions, so it can be more flexible and close deals quickly.
We don't need to delve into the ins and outs of corporate finance in this report. All you need to know is that NGPC lends money to cash-dry energy companies at exorbitant interest rates.
And, there is very little risk associated with the loans because NGPC demands collateral, equity kickers (shares), and a senior position in the pecking order during liquidations.
NGPC only lends money to very small companies. This is a very important feature of its business for four reasons:
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For starters, tiny companies don't have access to capital markets. They can't issue stock or bonds, and banks aren't interested. So they have a hard time borrowing money and accept high rates to get it.
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Secondly, tiny companies grow fastest... Not only are small companies the most desperate companies in the market for cash, but they have the most to gain from a loan. So they'll pay any price to get it... sometimes as much as 20% in annual interest payments, plus a piece of the ownership.
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Third, investing in small companies allows NGPC to spreads its portfolio over a large number of companies, sectors, industries, and geographical locations. Diversification is one of the secrets of the lending business. The more companies you hold, the more stable your returns become. NGPC has approximately 15 investments and considers companies in oil, gas, coal, electricity, transport, development, production, exploration, and pipelines.
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Finally, tax is the best reason for investing in small companies. The U.S. government thinks small businesses are vital to the economy and gives huge tax breaks to companies that lend money to them. NGPC is one of these companies.
The official term for NGPC is a Business Development Company (BDC) that has elected to be treated as a Regulated Investment Company (RIC) instead of a corporation for tax purposes. As a result, NGPC doesn't have to pay any corporate tax.
In return for its tax exemption, NGPC must invest in a diversified portfolio of small companies and it must pay out at least 90% of its revenue to shareholders in the form of distributions.
I've already given you many reasons to like NGPC... but I saved the best until last:NGPC's management is the best in the business.
I could tell you about the deep Ivy League, Wall Street, and Big Oil footprint that's all over these guys' resumes. According to the CEO John Homier, "the seniors in our group probably bring together 70 or 80 years, if not more, of cumulative experience in the energy finance business."
But I have something far better: I contacted one of its competitors and asked him what he thought of NGPC's management team. His name is Rick Rule, founder of Global Resource Investments. Global Resources was one of the very few boutique investment firms that survived the 20-year-plus bear market in resource investing.
It's no exaggeration to say that Rick knows every single important executive in the resource business, because for years and years he was the only person in the world who could raise a significant amount of money for small resource companies like the sort NGPC deal with.
Rick gave them the perfect reference. He told me these guys are the best in the business and they're very, very good at what they do.

Action to take: Buy NGP Capital . This is Resources Company (Nasdaq: NGPC) below $16.50ery important: NGPC is a small company with a $270 million market cap. Do not chase this stock above $16.50. Use a trailing stop.