A stock to soar on the fracking boom

Wall Street has overlooked this refiner and maker of specialty product, which still has room to run.

By Traders Reserve May 3, 2013 8:44AM

Natural gas plant © Kevin Burke CorbisBy Michael Shulman

Every so often a new word enters the popular media -- and profits are made by investors who discover that word before the general media and public do. The word of the day: fracking.

This process is an evolution of traditional hydraulic fracking that uses water and chemicals to crack open underground formations to release natural gas and oil. Savvy investors will want to seek companies that benefit most from a long-term, stable and low-cost supply of high-quality oil and gas. I know of one such company with enormous growth potential.

But first, how does fracking work?

Imagine standing on a layer cake. You are a chocaholic and you can easily see the layers hold chocolate. You also saw your dad making the cake and know he used a lot more than what can be seen in those layers. You also do not care for the vanilla cake that is holding up those layers of chocolate. What do you do? You cheat and stick a straw into those layers and suck all the chocolate out before dad comes home. And to get that chocolate out, you push some water down the straw first to loosen it up.

That cake in the real world is shale, and the chocolate is oil and gas. One of the best shale formations is the Bakken, much of it in North Dakota, producing oil. Another is the Utica Shale, a good deal of it in northern Pennsylvania and producing very high quality natural gas and natural gas liquids (NGL).

A refiner with enormous potential

Wall Street already knows this -- well, at least they can read a map -- but being Wall Street, they are missing the obvious.

I will review my favorite plays in the coming weeks, but let me start with a company that has enormous growth potential, a very high yield and that has already made me a hero to my subscribers.

The company? Calumet Specialty Products (CLMT). Never heard of it? Good. Neither have the geniuses on Wall Street. Better still, those somewhat familiar with the name don't understand the company.

Calumet is a refiner, but its business is not what you think. The company's refineries turn out specialty products -- CLMT dominates the market for aviation lubricants, makes the wax in lipstick and has a diesel-to-gasoline mix that helps insulate profits from movements in gasoline prices. Better still, Calumet refineries are in the Midwest. It bought older refineries for a song and put them back into production and is now building a brand new one in, where else, North Dakota.

The yield is 7.2%; that new refinery is going to boost profits and I assume dividends. Calumet stock is up roughly 50% since I first found it a year ago and still has room to run. Growth, income and a strong business model built on top of 50 or 75 years of oil.

Thank you, Mother Nature.

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