11/19/2012 8:45 PM ET|
Ready for the US energy boom?
The US is seeing an oil and gas revolution that promises to keep prices low for years to come. Here's how to invest in the trend.
Five years ago, I never imagined I'd type these words: By 2017, the United States will overtake Saudi Arabia as the world's largest oil producer.
In addition, according to the International Energy Agency, by 2015, the United States will overtake Russia to become the world's largest producer of natural gas.
The United States is now the fastest-growing oil and natural gas producer in the world. During the past five years, according to Citigroup, the United States has added 2.59 million barrels a day to total production.
You'd think there's an investable angle there somewhere.
I can think of four:
- First, the stocks of the companies responsible for this huge surge in U.S. production.
- Second, the stocks of the companies that will make money from solving the current bottleneck in getting this supply to market.
- Third, the stocks of companies that will benefit from the long time frame of this trend. The trend is likely to stretch on for a decade or two -- with a likely extension past 2030 as supply from Canada and Mexico increases. This will drive North America as a whole toward energy-self-sufficiency projects with long time lines that had been discounted on the risk that the boom would be over before they were completed.
- Fourth, the sectors in the U.S. economy that will reap benefits from lower U.S. energy prices, beyond the general advantages flowing to the U.S. economy from lower energy costs.
Let me start with the general picture and then move to individual sectors and trends.
What changed the picture
I don't think it's overstatement to call what we're seeing now "the shale revolution." Higher oil and natural gas prices met up with the maturing of technology pioneered in the 1970s to send oil production soaring. The new production is coming from shale formations that, until the development of new technologies for hydraulic fracturing (fracking), were thought unlikely to ever give up their oil content.
Not so long ago, the U.S. energy story was about an apparently irreversible decline in production from the big oil states of Alaska, Texas and California. Production from Alaska, for example, peaked at 2 million barrels a day in the 1970s. Production in the state ran at 567,481 barrels a day in March 2012. Production from Texas and California was falling as well.
Nothing shows the reversal in the trend more starkly than production figures from North Dakota. With 6,336 wells now pumping, oil production from the Bakken and Three Forks shale formations in North Dakota climbed to 575,490 barrels a day in March 2012 from 118,103 barrels a day five years earlier. That put North Dakota ahead of Alaska -- with its March 2012 production of 567,481 barrels a day -- and moved North Dakota into second place among U.S. oil-producing states. North Dakota now chases only Texas, which is seeing its own oil-shale boom turn projected production declines into production increases. Oil production in Texas climbed 12% from September 2011 to March 2012 to 1.72 million barrels a day.
The boom companies
The shale revolution wasn't led by Big Oil. To take one example, the key technique known as "slickwater fracturing" was pioneered by Union Pacific Resources, now part of Anadarko Petroleum (APC), and Mitchell Energy, now part of Devon Energy (DVN).
Big Oil has, in fact, been playing catch-up by buying acreage from smaller oil producers or buying the small producers outright. For example, Exxon Mobil (XOM) bought 196,000 acres in the Bakken formation from Denbury Resources (DNR) for $1.6 billion.
The problem with these deals, if you're an investor, is that they aren't big enough to move the needle at Big Oil. Take Royal Dutch Shell's (RDS.A) purchase of acreage in the West Texas Permian Basin from Chesapeake Energy (CHK) in September for $1.94 billion. That acquisition tripled Shell's production from unconventional sources and marked a major milestone in the company's march to have 250,000 barrels a day in worldwide production from shale by 2017. Even if the company hits that goal, shale would still make up just 6% of Shell's forecast 2017 production.
No, as I have written earlier -- as early as Oct. 21, 2011, in this post on Big Oil snapping up smaller players -- if you want to buy producers to take advantage of the U.S. oil boom, it's better to buy the small companies that staked out big acreage early. Names like Pioneer Natural Resources (PXD) and Concho Resources (CXO) might be familiar, since I've owned them on and off in my Jubak's Picks 12- to 18-month portfolio.
Pioneer is also currently a member of my long-term Jubak Picks 50 portfolio. The stock is up 5.28% since I added it to that portfolio on Jan. 13, but it's down 9.2% from its Sept. 14 high on worries about the global and U.S. economies. Concho Resources is down 12.3% since I sold it on May 21 at $90.26 for the same reasons. Other names to look at include Oasis Petroleum (OAS), Devon Energy, Rosetta Resources, (ROSE), EOG Resources (EOG) and Approach Resources (AREX).
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Moving the oil
Big Oil wasn't the only group of companies caught short by the unconventional oil shale boom in the United States. The mid-continent oil infrastructure wasn't ready for the boom, either. Whether it's a lack of pipelines, pipelines designed to flow in the wrong direction or even a lack of storage facilities, the infrastructure hasn't been able to handle the increased production of oil from these unconventional plays.
The result is a huge gap between the price that oil from these regions brings and the global market price for oil. Recent quarters have seen a huge discrepancy open up between the European Brent benchmark and the U.S. West Texas Intermediate benchmark. On Nov. 16, for example, WTI closed at $86.92 a barrel and Brent closed at $108.95 a barrel.
But that captures only some of the price gap created by the U.S. production boom. For example, on Nov. 8, at Midland, Texas, in the heart of some of the biggest unconventional plays in the country, WTI closed $7 a barrel cheaper than at the big central oil terminal in Cushing, Okla. The price difference between WTI and the Gulf Coast's Louisiana Light and Sweet has ranged recently from $8.50 to $30 a barrel.
Those price differences are a reflection of a glut of oil from these new sources because of a lack of transportation capacity to get the oil to Cushing or to the big refineries on the Gulf Coast.
As you might imagine, price differences like that have created boom times for any company that can get a bucket of oil to the end markets. It costs about one-third as much to transport oil by pipeline as it does by rail, but it takes years to build a pipeline. In the meantime Burlington Northern, now owned by Warren Buffett's Berkshire Hathaway (BRK.A), and Union Pacific (UNP) have seen rising revenue from this oil boom (just in time to make up for a decline of shipments in coal).
The big build-out plays
Eventually, the pipelines will catch up -- and the longer the boom runs, the more sense it makes to build a new pipeline. From that long-term perspective, I'd look at Magellan Midstream Partners (MMP), because of its focus on pipelines in the mid-continent region and its connections to Anadarko Petroleum, one of the biggest players in the Bakken formation, and Plains All American Pipeline (PAA), with its interesting mix of pipelines and storage capacity in the region.
I'd like to get these shares of these a little cheaper than they trade today, with dividend yields of 5% or higher. They now yield 4.67% and 4.82%, respectively.
There's a similar investment opportunity in the demand for liquefied natural gas terminals that would enable natural gas producers to ship cheap gas from producers in the United States and Australia -- on trend to run neck and neck with Qatar as the world's largest exporter of natural gas by 2030. If you're interested in investing in this transportation trend, I'd suggest Cheniere Energy (LNG), the leader in the race to build the first liquefied natural gas export terminal in the United States.
The increase in U.S. oil production isn't occurring in isolation. The same fracking technologies and unconventional geologies that are at the heart of this increase in oil output have produced an even bigger boom in natural gas production. Between the two hydrocarbons, energy prices in the United States will be cheap compared with those in the rest of the world. Electricity, for example, is forecast to be about 50% cheaper in the United States than in Europe, according to the International Energy Agency, over the next two decades as the U.S. relies on cheap natural gas to fire new power plants.
The cheap energy plays
Cheap energy is no guarantee of faster economic growth, but it sure won't hurt, as cheap energy prices get factored into the thinking of companies trying to decide where to locate production. The biggest effect will be in industries where energy --and natural gas in particular -- is a huge percentage of the cost of raw materials. Think Dow Chemical (DOW), DuPont (DD), and LyondellBasell Industries (LYB) in chemicals or CF Industries (CF) in nitrogen fertilizers. Companies that rely on the chemicals produced by these companies for raw materials for their own products will also benefit from lower U.S. energy costs. Paint-maker Sherwin-Williams (SHW) comes to mind.
And the effects of cheap U.S energy and the boom in U.S. oil and natural gas production aren't limited to the U.S. economy. I don't expect global oil prices to fall dramatically as more U.S. oil production works its way into the global supply chain, first as refined petroleum products and eventually as oil exports. The gradual recovery in U.S. and Chinese economic growth should keep prices in something like their current range. But that current range is bad news for some of the world's biggest oil exporters, and most especially Russia. Russia needs an oil price near $120 a barrel to balance its national budget and to attract the capital it needs to modernize its own industry.
It's not clear that the surge in U.S. oil production is enough to put a damper on the very expensive oil produced by Canada's oil sands industry or that promised from Brazil's deep, deep, deep water South Atlantic finds, but I'd certainly steer my portfolio away from the most financially leveraged companies in these projects. Cheaper natural gas and oil aren't exactly what the beleaguered global solar and wind industries need, either.
What could change the trend
And, of course, in general it pays to think about what can go wrong -- and about how fast the energy picture can change (and change again). A good part of the swing toward the possibility that the U.S. will become an oil exporter again –- or at least achieve self-sufficiency in energy use and production -- is due to expanding production. But it is also a result of increased energy efficiency in the U.S. economy prompted by higher energy prices over the past decades. (The International Energy Agency says production is about 55% of the story and energy efficiency 45%.)
If an increase in oil production leads to a rollback in those gains in energy efficiency, you can throw energy self-sufficiency as a goal out the window. (The International Energy Agency has said that its projections for U.S. energy self-sufficiency assume that the U.S. will continue to increase energy efficiency for its cars, homes and appliances.)
I'm sure this boom in U.S. energy production from unconventional sources will persuade many people to completely discount the theory known as Peak Oil. Certainly the hard form of Peak Oil is dead, but the more realistic form, which held that U.S. production from conventional sources had peaked in the 1970s and was in decline, still looks good for the U.S. and the global oil industry as a whole. From this perspective, you can think of each successive "exhaustion" of a conventional source of oil as something that will move the base price of oil higher, even if all the conventional supply is replaced by (more expensive to produce) unconventional sources.
And finally, of course, there's the possibility that the real world will deliver enough disasters, storms and data to convince everyone that global climate change is real and that the world needs to reduce its burning of all forms of hydrocarbon, even natural gas. Personally, I find the data on climate change convincing, and I wish that the United States and the world would move on this problem sooner rather than later. But just because I wish it doesn't make it so. One of the essentials in investing is separating the world as you'd like it to be from the world that is likely to be. Surveying the world, with some sadness, I don't see action on global climate change as a near- or medium-term danger to any investment in oil stocks.
Updates to Jubak's Picks
These recent blog posts contain updates to the stocks in Jubak's market-beating portfolios:
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At the time of publication, Jim Jubak did not own or control shares of any company mentioned in this column in his personal portfolio. The mutual fund he manages, Jubak Global Equity Fund (JUBAX), may or may not now own positions in any stock mentioned in this column. The fund owned shares of Cheniere Energy at the end of September. Find a full list of the stocks in the fund as of the end of September here.
Jim Jubak's column has run on MSN Money since 1997. He is the author of the book "The Jubak Picks," based on his market-beating Jubak's Picks portfolio; the writer of the Jubak's Picks blog; and the senior markets editor at MoneyShow.com. Get a free 60-day trial subscription to JAM, his premium investment letter, by using this code: MSN60 when you register at the Jubak Asset Management website.
Click here to find Jubak's most recent articles, blog posts and stock picks.
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Chicken or the egg. Prices have to be high or you can't afford to frack. Can't frack if oil isn't expensive. Can't mine oil sands either.
If people think the price of gasoline is going to go down just because it's american oil, think again. It will be sold at the global price to the highest bidder. The oil companies are not in this to make us energy self-sufficient, they are in it to maximize profits. That's how capitalism works. All those pipelines run downhill to portside refineries that are ready to load it on tankers to china. These new technologies are not really increasing the amount of oil globally, they are just changing who is providing it. With prices where they are, it's just become economically and politically viable to frack.
Jubak is correct in that the companies leading this new oil rush could do well which is the point of the article I suppose. We will also create some jobs here at home too which is a positive. It will also crush green energy for a while which is a worry but history has shown that we will not embrace green energy until it becomes economically advantageous. Big energy wants to stay competitive or they go bye bye.
If they really wanted to lower our transportation costs they would be pushing CNG and building the infrastructure for it. That would lower the demand for oil though so you would stop the oil boom in its tracks. Why would the oil companies spend all that money on infrstructure just to compete with themselves? Why should the government spend money on the infrastructure just so the oil companies can make more money? Quite a pickle Neo.. I guess we are lucky that they own it all so they can control it in a way that's best for us. Right.
We all need to remember how this works when the oil companies ask for a pipeline from North Dakota (or Canada) to New Orleans. Who does that really help? If it lowers my fuel price I'm on board, if it makes it cheaper for them to ship fuel to China forget it. Good luck getting an honest answer to that question!
I think the article makes some good points. Like many of Jim's articles, there is real industry and corprate level analysis, rather than a bunch of macro economic opinion.
Unfortunately, it's the latter that rules today. The price of oil in the future will be determined more by the number of dollars printed out of thin air by the Federal Reserve than anything the oil industry does.
Just yesterday Miryahdi ..sp was saying how we were going to feel more pain at the pump. Today we have an energy boom. I guess they are not mutually exclusive.
Government, the oil companies, and the auto industry all have a target cost per mile that the public will pay. As we have exhausted our oil, government has dictated higher mpg fleets and the automakers have obliged. The auto makers like it when fuel goes up because it makes you go out and buy a new car. The governemnt likes it because they get to tax the whole show. The oil companies get to keep chugging along making efficient use of their expensive infrastructure. (No big refineries have been built since 1977 but that's for another day)
What they all don't like is when we stop (or reduce) driving. The whole machine breaks down when that happens. We quit buying cars, refineries have to start and stop (very bad), storage gets full and they actually have to dump fuel ie lower the price to move it. Now that the housing boom has popped, we are no longer buying cars every three years and our cost per mile has risen. The average age of cars on the road is now 11 years and they are not efficient enough to deliver that cost per mile we will accept. We are beginning to drive less and that scares the crap out of the big boys. Our lack of consumption hurts the system as much as the lack of credit hurts the financial sector. Everything must keep moving and growing or it drowns like a shark that stops swimming.
Now all of a sudden it is OK to frack when it wasn't for many years. (I'm not passing judgement on the safety of fracking. I just don't know) I think of allowing fracking like Fed intervention for the energy sector. It might hurt or it might help. It probably won't fix anything but we will feel like we are doing something. Now if only the oil companies would actually sell the fuel cheaper to us it would make sense. Not going to happen. Plentiful fuel at $4.00/gallon will not help. We are still going to drive less until our cost per mile drops.
Nice to see some new jobs though. Any industry returning to America is a good thing.
Some one here was grousing about the fact that the U.S. is producing more oil today than anytime in the last X years and yet the price at the pump is high. Rightly, the poster mentioned the weakening dollar (Fed Policy) as a cause.
But the bigger point in my opinion is that energy independence or increased U.S. production has never been about prices. Oil is a world commodity and the price will reflect world production, demand, and the price will float on that as well as teh value of the dollar. So we need to get over it. However, the focus needs to be on several things. One and not necessarily first in importance is security. As a nation we have a lot more flexibility if we don't ahve to worry about the Middle East. But the BIG STUFF is as follows. Why do we want to send something like 700 billion dollars of U.S. wealth overseas each to buy the stuff? Why not buy the stuff for U.S. companies? Every here of "BUY AMERICAN"? Oh, right ... that does not apply to evil oil companies. Sure it does. Why not enrich shareholders of American companies, why not enrich every American with a pension or a 401K? Bottom line is wealth creation, and oil production is wealth creation, is HOW PROSPERITY is built. Then there are the jobs. Why do we want to creat hundreds of thousands of jobs in the Middle East oil fields? Why not creat jobs here? The unemployment rate in the Dakotas is 3%!!!!
Sorry to say, forget the price at the pump, there are a lot of good reasons to creat wealth, prosperity and jobs at home! And a bit more world supply can't hurt prices either.
Fosz, you say the only people benefiting from oil production are the people in control of the flow of oil.
Tell that to the people with $100,000 a year jobs in the Dakoatas and all the related supplier jobs!
Sure the only person benefiting from the Iphone is Steve Job's estate. Ayn Rand was a prophet. This stupidity is just that stupid. Heck we don't need any business, Iphone and gasoline just falls from teh sky and some evil person picks it up and makes us buy it. God Help Us is right.
I really don't know where you get this stuff. You are confusing the reader by talking about oil production like it was oil prices. Oil prices had to go up for oil companies to resume oil production, otherwise this new "boom" (which it is not) would not have been feasible.
Of course oil production in the U.S. is going up, mainly because oil production is going down in places like Saudi Arabia as their fields have started to decline.
All this talk about another oil "boom"in America is pure propaganda. Oil consumption by emerging economies like China and India are competing head-on with demand by the U.S. and Europe.
Also, the Alaskan fields are reaching the end of their useful life. Some time in the near future flow won't be enough to push oil through the Alaskan pipeline. What is currently coming down the pipeline is high in water, which freezes in the Alaskan winters. And at present, there isn't enough reason to update the pipeline or justify heating.
Also, the Canadians are getting seriously worried that the U.S. is going to start treating their oil like its U.S. Oil. The old Monroe Doctrine rearing its ugly head is very scary to the Canadians.
So, like tell it like it really is. And stop it with the propaganda.
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