Keep Your Oil, OPEC!

Robert is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

And good riddance, too.

Oil industry economist and consultant Philip K. Verleger, Jr. recently predicted that the United States will export more energy than it imports within a decade.  Five, certainly ten years ago, to make such a claim would require someone smoking some pretty strong stuff.  Today, they would likely be viewed as overly optimistic.  That optimism may not be altogether unfounded.  First, American consumers and businesses are more fuel efficient.  As Ezra Klein showed in the Washington Post, the US is squeezing more GDP from a barrel of oil than ever.


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Second, hydraulic fracturing, of course, has boosted domestic energy production to previously unimaginable heights.  Today, US domestic oil production is 6.2 million bbl/day, up from 5 million bbls/day in 2008 with greater production expected in the future.  Natural gas has risen 66.2 bcf/d from 59.3 in 2009.  Lastly, renewable energy has grown to 9.2 trillion btu’s from 7.2 trillion btu’s in 2008 (latest data from useia).

So how do we make a buck on this worthy but elusive goal of energy independence? 


First, look at the energy producers themselves.  Cabot Oil and Gas (NYSE: COG) claims to have eight of the top ten and 14 of the top 20 producing natural gas wells in the Marcellus shale formation.  The Marcellus operations are important since production costs there allow profitable gas extraction even at today’s low prices.  The profits should keep on coming, too.  Cabot’s natural gas production increased 45% over the past year and that was mainly from increased production from current wells rather than drilling more wells.  With 3 tcf of natural gas reserves in Marcellus Shale, Cabot will supply the market and make money off it for the foreseeable future.

Among oil producers, Linn Energy (NASDAQ: LINE) is my favorite.  It’s actually a natural gas and oil producer.  Right now, Linn is on a tear in two ways:  First, its Hogshooter oil wells are producing and 11 new wells are planned for the balance of 2012.  Linn has shifted its production focus away from natural gas into more profitable crude oil and its Hogshooter efforts have paid off.  Second, Linn acquisitions are strengthening the company for future growth.  Specifically, Linn spent over $2.3 billion this past year on buying natural gas fields from Wyoming to Texas.  The future will likely bring higher natural gas prices and when it happens, these acquisitions should boost Linn’s bottom line.  Management has also hedged its oil and natural gas production, further securing investor returns.  Did I mention the 6.9% dividend?


Second, there are pipeline companies.  After all, someone has to move all that oil and natural gas from Point A to Point B and a pipeline company makes a buck off of every barrel or cubic foot they handle.  Plains All American Pipeline (NYSE: PAA) transports oil and has been steadily increasing its earnings and dividends for the past three years.  With the recent acquisition of liquified natural gas operations from BP and expansion plans in the Permian Basin and Eagle Ford oil fields, Plains will likely be an All American investment for the future.  For natural gas pipeline companies, there’s El Paso Pipeline Partners, LP (NYSE: EPB).  El Paso represents the steady player, using its net profit margin of 36% to build earnings and dividend momentum.  ThecCurrent dividend is about 6.4%.  El Paso was recently acquired by Kinder Morgan and should derive some administrative efficiencies from them.


Lastly, there are speculative but intriguing unconventional energy producers.  KiOR (NASDAQ: KIOR) produces oil from biomass.  Investors are effectively betting that a planned commercial production plant in Mississippi will open on time and produce oil as promised.  If KiOR doesn’t, it doesn’t have enough cash to keep going past early 2013.  So far so good, but I suspect many are holding their breath on this one.  Perhaps not so high risk is Oxford Catalysts Group (London:OCG).  Backed by Chesapeake Energy, Oxford is building a plant in Pennsylvania to produce oil from natural gas.  Using a process developed in Germany in the 1920’s, Oxford hopes to make more profitable premium diesel fuel, jet fuel or gasoline from cheap natural gas.  For example, Oxford claims it can make diesel fuel for $1.57/gal.  Apparently, Royal Dutch Shell is doing this in Qatar, let’s hope Oxford can do it in Pennsylvania.

I am old enough to remember the oil shocks of the 1970’s.  Even though I was just a kid, I could see the long lines at gas pumps, the economic problems, the grown-ups fretting about what the future held.  I also remember Arab sheiks living in fabulous opulence.  Today, I drive a Honda Civic Hybrid, recently replaced my oil burner with a more fuel efficient model, and invested heavily in insulation for my house.  In The Grand Scheme of Things, my efforts aren’t much, but in my own way I’m poking OPEC in the eye.  Fortunately, I’m hardly alone.  Businesses and consumers alike are reducing their oil consumption.  That, plus increasing domestic production may, just maybe, someday, let Americans not only poke OPEC in the eye, but give OPEC a swift kick in the ... um fanny.  And savvy investors will make a bundle in the process. 

dylan588 has position in Cabot Oil & Gas. The Motley Fool has no positions in the stocks mentioned above. Motley Fool newsletter services recommend El Paso Pipeline Partners LP. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.If you have questions about this post or the Fool’s blog network, click here for information.

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