Anyone searching for long-term gains in natural gas has been
through an epic journey in the past year or so. From January 2011
to April 2012, natural gas prices fell an astounding 80%, dragging
energy stocks down to new multi-year lows and creating big losses
for many energy investors. Take a look at its descending trajectory
in the chart below...
But even though on the surface this may look like a colossal
failure, the reality is that this decrease is actually a reflection
of the industry's success. Energy companies were so successful at
extracting more gas from the ground that themarket simply became
oversupplied and prices crashed. It's simpleeconomics . The
supply/demand imbalance was exacerbated by an infrastructure that
hasn't fully migrated to a wide-spread natural gas consumption.
But now, after a tough year and half for natural gas and energy
stocks, the tide has begun to shift. After falling to a four-year
low below $2 in April, natural gas has quickly ralliedback up 25%
in the past six months. Take a look at the extended move lower and
Rising prices or even price stability will have a positive
effect on the energy industry in general. Old natural gas projects
will consequently become more profitable while new projects will
have less risk of reporting losses. In the meantime,
as more electric utilities convert from coal to
, the manufacturing infrastructure will start to increasingly
demand more natural gas.
But the recent jump in natural gas prices is just a
shadow of what's about to happen.
Simply put, the United States could soon become the new Saudi
Arabia of the world in terms of energy production. In fact, The
Associated Press just released a new report predicting the United
States could soon pass Saudi Arabia as the world's largest
energy producer because of its huge oil and natural gas reserves,
and growing production capacities.
The Department of Energy is forecasting that U.S.
production of crude and otherliquid hydrocarbons, including
biofuels, will average 11.4 million barrels per day next year. With
Saudi Arabia projected to produce 11.6 million barrels, it's a
virtual dead heat between the two countries. Further down the line,
Citibank is projecting domestic production levels of 13 million to
15 million barrels by 2020, which would potentially be enough to
dethrone Saudi Arabia as the energy king of the world.
If this prediction proves correct, then North American energy
stocks will likely be in position for huge gains. There will be
many different sectors and trends toprofit from, but six stand out
as the defining forces of the booming energy industry in the years
Integrated and majors
Large diversified energy companies are one of the most
conservative ways to invest in energy. Having global
businesses andmultiple product and service lines, these
integrated players such as
Exxon Mobil Corp (
Conoco Phillips (
are more diversified and equipped to navigate volatility in
one market or region of the world. Integrated energy
companies also typically pay adividend , an extra attraction
in world on rock-bottom interest rates.
Exploration and production
These are the companies that own, buy and lease land used to
drill and explore fossil-fuel resources like crude oil and
natural gas. This is one of the more aggressive methods of
investing in energy, because the price of crude and natural
gas heavily affects earnings and cash flows of
exploration and production companies. This has weighed on
industry leaders such as
Apache Corp. (
Anadarko Corp. (NYSE: APK)
, both down about 25% on the year for instance. But this
volatility also means more upside as exploration and
production companies provide solid leverage to
rising crude and gas prices.
Service providers specialize in helping exploration and
production companies extract crude and natural gas. This
includes a wide range of services but most frequently
consists of drilling services. Service provider's
revenue is driven by capital spending from exploration and
production companies, so the two have a strong correlation
with each other. Service providers are more aggressive
than integrated energy stocks but less aggressive than
exploration and production.
Selling consumable goods to energy companies extracting
millions of barrels of oil and natural gas per year is a good
business. The production process to bring crude and natural
gas out of the ground is intense and requires a lot of
specialty equipment and resources like sand, water, chemicals
and other consumable goods.
Carbo Ceramics Inc. (
is one of my favorite stocks in this segment. Carbo
sells ceramic proppant, a key ingredient used in the
hydraulic fracturing boom hitting North America. The
company's share price is down 41% this year, which has pushed
Carbo deep into value territory.
This is a highly insulated industry. It's just not that easy
or inexpensive to build an international network of pipelines
capable of transporting millions of barrels of crude and
natural gas every year. Pipeline companies such as
Buckeye Partners LP (
El Paso Pipeline Partner LP (EPB)
, which are incorporated as limited partnerships, require
them to pay out 90% of their earnings to shareholders. This
creates a solid income stream for many investors.
There is a severe shortage of refining capacities in North
America, considered to be a "bottle neck" in the production
of gasoline and other consumable petroleum products. But
regardless, refiners have had a huge year, driven by record
crack spreads that made refining a barrel of crude very
profitable. This has
Western Refining (WNR)
up 86% on the year and industry competitor
Valero Energy Corp (VLO)
up 42%. Looking forward, capacities remaining tight in
the face of growing production should provide
long-term pricing power .
Risks to Consider: The regulatory environment will play a
critical factor in new drilling permits and total production
levels. Although permits are back on the rise in the Gulf of
Mexico, access to additional domestic energy resources in Alaska
and the East Coast is still in question.
Action to Take -->
In spite of the recent bounce, natural gas is still trading at
historically low levels. Energy stocks look the same, trading near
multi-year lows in spite of strong earnings and cash flows. This
makes this the perfect time to take a serious look at the group and
select your favorite stocks. Everyone is fearful of energy stocks
now, so it's time to be greedy and jump in ahead of the crowd.
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