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The World in 2050

Posted
8/6/2012 12:14:00 PM
By: Cabot Heritage Corporation
Referenced Stocks:EPD;MLP;MMP;OKS;PAA

Oil Consumption: U.S. vs. China

Energy Investing for the Long Term

Energy Stocks for the Short Term

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The World in 2050 by Laurence C. Smith describes four global forces that are impacting the world today: demographic trends, natural resource demand, climate change and globalization. 

Essentially, Smith predicts a growing global population with changing demographics will increase stress on diminishing resources from hydrocarbons to water, compounded by an increasingly warmer climate due primarily to increasing CO2 and industrialization. 

One net result will be improved economic and weather conditions for countries closer to the Northern Rim of the Arctic. Another result is that critical resources for sustaining life on earth will be under increasing stress or limited supply.

The book's thesis made me take a look at energy, crude oil in particular, and the nations that consume it as a constrained resource. 

The most significant nation in terms of GDP growth today is China, with roughly 1.3 billion people or about 20% of the world's population. China currently consumes about 11% of global oil production, or about 0.31 gallons per capita. 

The U.S., with about 4.5% of the global population, currently consumes nearly 21% of global oil production, or 2.55 gallons per person.

Chart1 8612

Or in terms of barrels of oil, China currently consumes 9.8 million barrels per day, while the U.S. consumes roughly 19 million barrels a day.

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Pondering that thought, I did a couple of calculations.

In 2011, China's GDP was roughly 43% the size of the U.S. GDP or the U.S.' GDP was 2.3 times larger. From 2000 to 2011, China's GDP averaged 10% per year growth, while U.S. growth averaged 2.0%. 

As China's GDP continues to grow more rapidly than the U.S., China's energy/oil consumption should eventually surpass U.S. oil consumption. 

chart3 8612

If China's per capita oil consumption were to increase to the current U.S. consumption level, China would consume roughly 81 million barrels a day, or nearly the total current worldwide oil consumption! 

What is critical to understand is that China's impending oil demand--not to mention the appetites of the rest of the developing world--will put severe strains on global oil supplies that will not be able to keep pace with the rising demand. 

The net result will inevitably be higher crude oil prices-and higher prices for energy stocks. So you absolutely want to own energy stocks for the long term to capture those gains.

chart4 8612

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But what about the short-term?

Crude oil prices are likely to continue to be very volatile for a while, but there are still some smart energy investments out there for the shorter-term. I recommend focusing on stocks with high dividend yields, low short-selling interest, good growth prospects and strong balance sheets. If possible invest in stocks that are trading near their 52-week lows. 

These stocks are positioned to grow when the energy sector stabilizes, and until then, their dividends will provide solid income.

One stock I've recently recommended for the shorter-term (a six months to one year) investment timeframe is Plains All American Pipeline ( PAA ) , a Master Limited Partnership ( MLP ). 

Plains All American Pipeline transports and stores primarily crude oil, refined products and liquid petroleum gas (LPG) products in the United States and Canada. It operates in three segments: Transportation, Facilities and Supply and Logistics. 

I compared Plains All American Pipeline to three of its midstream MLP peer operators: Enterprise Products Partners ( EPD ), Magellan Midstream Partners ( MMP ) and ONEOK Partners ( OKS ). 

On a relative basis, Plains All American Pipeline stands out among the four as the better investment with the better dividend yield, low to insignificant short selling interest, good growth prospects and a good balance sheet. 

PAA does trade near its 52-week high, but also trades at a relative 2013 price to earnings (P/E) discount to its peers. The company has significant positive net free cash flow even after deducting interest expense. 

chart 5 8612


Caption: 
Over the last year, Plains All American Pipeline ( PAA ) has outperformed its peers.


chart 6 8612

Caption: 
PAA moved higher as crude price volatility sent energy investors scrambling for yield with low downside exposure. Immediate support is its 50-day moving average at 81.55.


My price target for PAA is 97.65 per share over the next six months. My recommendation is to start with small purchases now and look to buy more on pullbacks toward support, particularly if crude prices soften. Invest for the long-term, take the dividend and be patient. Place a firm stop loss order at 78.50.

From the Oil & Gas Patch,

Lou Gagliardi
Editor of Cabot Global Energy Investor