The United States of Energy
Mark is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
The International Energy Agency (IEA) just released a report on the state of the international energy sector and projected that by the year 2020 the United States will surpass Saudi Arabia and Russia to become the world's biggest producer of crude oil. I'm not joking.
Other studies have indicated that within the next two to three years the U.S. will also become the world's biggest producer of natural gas.
As the result of the technical innovation that has led to more efficient methods of extracting oil and natural gas from shale rock and deep ocean waters the country is rapidly on the way to becoming less reliant on foreign sources. There will be no waiting in long lines to fill up your gas tank like there was in the 1970's.
Although this development won't necessarily lower gasoline prices on its own it is still good news. There is the potential that faster growth in the energy industry can contribute to an improved overall economy, create more jobs, and redirect federal spending. For example, instead of maintaining a large military presence in the Persian Gulf area to protect shipping lanes we may be able to use the funds in other ways.
And it will lead to investment opportunities in businesses that take advantage of reduced energy prices based upon hydraulic fracturing ("fracking"), horizontal drilling and improvements in offshore operations, the technologies that are driving the boom.
Oil and gas
Many of the companies involved in the transportation and storage of energy supplies are classified as master limited partnerships (MLP). Most MLP's provide very competitive dividend payouts and they should be considered for your portfolio if income is important.
Energy Transfer Partners, L.P. (NYSE: ETP) is one MLP to look at. The stock currently has a hefty 8.5% dividend yield. They just announced that one of their goals is to step up their payouts in the future.
It has grown from 20 employees in 1997 with operations only in Texas to 14,000 employees today in six states. Just in the "midstream" natural gas area the company operates approximately 12,000 miles of consolidated gathering pipelines, 8 processing plants, 17 treating and 5 conditioning facilities. It has other business interests such as natural gas liquids, interstate and intrastate energy transportation and operation of Sunoco retail gasoline stations.
Enterprise Products Partners LP (NYSE: EPD) is a diversified MLP in the midstream energy space that operates pipelines from Utah to Texas to New York as well as owning storage and processing facilities, offshore platforms and even tugboats. Since its IPO in 1998 assets have grown from $175 million to $34 billion. It pays an annual dividend of about $2.60 a share.
Big oil could also see a bump over the next decade too.
The world's largest oil producer and number one ranked company on the Fortune 500 list, ExxonMobil (NYSE: XOM) could benefit. Last year the company generated revenues of over $470 billion. Theoretically, if domestic production goes up the company could reduce its costs and increase margins. Earnings could rise as the result. Right now ExxonMobil has relatively thin margins.
In addition to traditional exploration and production projects the company is currently participating in liquefied natural gas (LNG) ventures in Indonesia and Qatar. There are plans in place to expand LNG operations to Australia and western Africa.
Petrochemicals and steel
Companies involved in the manufacturing of fertilizers and steel tend to be heavy users of natural gas and could also see reduced costs and increased margins driving future EPS growth.
Nucor (NYSE: NUE) is the largest mini-mill steel producer in the country and is based in Charlotte, NC. It produces 25 million tons of product annually, primarily by recycling scrap steel.
It's possible that their relatively low margins (10% gross, 2% profit) will improve if natural gas prices remain subdued. Nucor also pays a nice $1.46 per share annual dividend, and is a member of the Dividend Aristocrats, companies which have increased their payouts every year for at least 25 consecutive years.
In the petrochemical space Potash Corporation also stands to benefit from lower natural gas prices. It already has relatively healthy margins and it's possible to see even better performance. However, the worldwide market for fertilizers in developing countries like India would have to improve further to fully take advantage of the energy boom. Meanwhile, a dividend of $0.84 could tide you over.
Utilities that currently burn coal to generate electricity could switch to gas-fired plants if prices remain low. In general electricity is less expensive to produce using natural gas. There could also be a lower amount of "greenhouse" gases emitted. Many scientists believe hydrocarbon pollution contributes to climate change, so a changeover will benefit society as well.
One such utility is American Electric Power (NYSE: AEP) which is the largest consumer of coal in the United States. It recently announced that it will not retrofit its coal-burning Big Sandy plant in Kentucky with emissions controls that would have allowed it to meet tougher federal and state regulations. Will it build a gas-fired plant there instead? That remains to be seen. The company is in the midst of closing 5 of its 21 coal plants in the country.
AEP is a relatively stogy company, with revenue and earnings growing only about 2% to 3% per year. However, it pays a nice $1.88 per share dividend, yielding about 4.6%. Might be good for an income producing portfolio.
So as the United States moves towards less reliance on foreign sources of energy over the next few years this will not only benefit society but certain businesses as well. Expect improvements for the economy, the environment and for investing.
Mathman6577 has no positions in the stocks mentioned above. The Motley Fool owns shares of Nucor and ExxonMobil. Motley Fool newsletter services recommend Enterprise Products Partners L.P. and Nucor. 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.