Should you avoid stocks? Are interest rates about to skyrocket? Is the economy about to go into recession? The answer is…”it’s possible!” Regardless, my wish for you is to be informed and focused on the right reward-to-risk opportunities.
It was a blistering hot day in 1979, sweat stinging my eyes as we sat in line among the many seeking to fill their gas tanks. The Country’s second energy crisis of the decade was triggered by widespread panic surrounding geopolitical events. A recession came in 1980, and I remember the burdens my single-mother had to endure in order to keep us clothed, fed, and sheltered. Several recessions and crises later, I have learned to exact a little revenge as a professional who researches and successfully invests in North American energy, infrastructure and engineering stocks and bonds.
People often get emotionally charged about “Big Oil” and “Rich Fat Cats,” and you have most likely seen many magazine covers, newspaper articles, and television interviews on the global fortunes won and lost in the energy sector. Still, thirty-five years after my miserable experience in line at the local Texaco filling station, the United States, Canada, and Mexico are only at the cusp of an exponential energy renaissance. It is not too late for you and your portfolio to benefit and to take a little something back in capital gains and income.
Tip: Never make investment decisions
when feeling euphoric or despondent.
U.S. oil production peaked in the 1970s, and U.S. dependency on foreign oil grew with the ensuing 30 years of production declines. To be sure, this subject is not without its controversies; however, the North American energy landscape is quickly evolving into a revolution:
- technological advances
(safer hydraulic fracturing and horizontal drilling)
- massive and economical shale discoveries (fossil fuels, i.e. dead dinosaurs)
- tenacious oil and gas workforces (Pride, Hard Work, and Skills)
- gradual political and regulatory shifts (drilling, exporting, transporting)
- efficiencies in use, transport and renewal (highway & light bulbs, ships, garbage)
According to the Energy Information Administration (EIA), total U.S. energy reliance on non-domestic sources could be as low as 4% in 2040, compared with 16% in 2013 and about 30% in 2005. Said another way, it is estimated that domestic production satisfied 84% of total U.S. energy needs in 2013 versus only 70% in 2005! The EIA estimates that at current consumption rates there is enough natural gas in the U.S. to last about 100 years. The combined potential of the U.S., Canada, and Mexico are ranked top in the world and may surpass the natural resources discovered in the Middle East, South America, and Russia. The United States is the clear leader in technical expertise and energy innovation. Shaded areas of natural resources are shown on the U.S. map further down in this post. You may have heard of abundant areas like Marcellus, Barnett, and Permian.
The Energy Value Chain
Tremendous momentum in oil and natural gas production continues to drive opportunities across a wide spectrum of sectors and regions. Thank you to Boston Strategies International for the above illustration that encapsulates much of the energy value chain. A series of activities must occur to ultimately deliver valuable resources, products, or services to end users who love to drive, grill, and stay warm or cool. The United States has the potential to massively expand its capabilities as an exporter of energy products. Negative headlines, doubts, and drops in investment values will occur from time to time. View these inevitable market worries as potential opportunities to wisely invest, as the energy independence story is real, growing, and likely to be a solid foundation for North American economies for decades to come.
Below are five categories of the energy value chain for you or your portfolio advisors to research. There are ample investment opportunities that will range in company size, income production, and level of risk.
- Upstream investments include exploration, drilling, and production
- Midstream investments include pipelines, storage, and processing facilities
- Downstream investments include power generation, transmission, and distribution into your home, industrials, and transportation vehicles
- Supportive investments are available in engineering, field services, materials, supplies, equipment, and environmental protections
- Natural Gas Liquids (NGLs) and refined crude oil byproducts are inputs into a wide range of products, including fertilizers, plastic containers, tires, carpet, and paint so there are positive implications for manufacturing industries too.
20+ years of investment experience have kept me true to my framework: Be Patient, Possess a Defined Discipline and Process, Customize Selections and Decisions Based on Your Unique Portfolio-Period!
While much of the world was knocked off course by the financial crisis of 2007-2008 and its aftermath, the energy sector has added fuel to the otherwise mediocre economic recovery. States like Texas, Wyoming, Pennsylvania, Louisiana, and West Virginia are known for their respective energy production rankings. North Dakota is the fastest growing state with unemployment below 3% and has an economic growth rate in the double-digits. The Utica Region in eastern Ohio is one of the fastest growing natural gas production areas.
The below Bureau of Labor Statistics (BLS) chart illustrates 10 years of
employment growth in Oil & Gas employment.
One of the greatest potential percentage growth opportunities resides in the global demand for liquefied natural gas or LNG. This predominately methane product has been converted to a liquid form through a cooling process to minus 259 degrees Fahrenheit. LNG is a clear, colorless, odorless liquid that occupies only a fraction (1/600) of the volume of natural gas making it easy to store and transport.
Why use LNG?
Natural gas is considered the cleanest burning fossil fuel. It produces less emissions and pollutants than either coal or oil. Historically the United States imported LNG to numerous import facilities along the Gulf Coast and on the East Coast. Many existing and proposed LNG facilities have applied for licenses to export LNG to foreign countries who view the fuel source as an extremely price-competitive means to help meet future economic needs. For instance, Japan is actively seeking strategies to meet shortfalls caused by the Fuksuhima nuclear power disaster.
Panama Canal Expansion
As early as the 16th century, American and British leaders and businessmen wanted to ship goods quickly and cheaply between the Atlantic and Pacific coasts. The Panama Canal opened officially on August 15, 1914 after many lost investments and lives. President Theodore Roosevelt oversaw the realization of this goal as shown in a photo of the President on a steam-powered digging machine during construction of the Panama Canal. (Photo Credits: H.C. White Co., N.Y)
Today’s ongoing expansion of the Panama Canal is the largest project at the Canal since its construction 100 years ago. Objectives call for a third set of locks, a Pacific access channel and dredging of existing navigational channels. The completed expansion should double the Canal’s capacity, having a direct impact on economies of scale and international maritime trade. This will prove hugely beneficial to accommodate LNG carriers who cannot currently pass through the Canal’s walls. For instance, one shipper from a terminal in Louisiana estimates its shipping time to Asia may be reduced from 64 days to 44 days.
How is LNG transported?
Shipping companies are building 1,200 foot long vessels, and buyers are signing contracts for the double-hulled ships specifically designed to handle the low temperature of LNG. These carriers are insulated to limit the amount of LNG that boils off or evaporates. As of December 2013, the LNG fleet stood at approximately 387 ships with new and larger vessels on the way. (Source: IHS Fairplay)
Please visit the official website of the Canal De Panama Project for great photos, video, and updates of the expansion: http://micanaldepanama.com/expansion/
Is the sweat beading up on your brow as you try to outguess the next crisis or market drop? Are you sitting in line with the crowd, beholden to fill-up on group-think stock, bond, and economic analysis? The clouds may darken overnight; however, I want to throw down a challenge for you to remain calm as a fellow educated investor in a magnificent shift as powerful as demographic trends, tax reform, or any other human constructed crisis.
There is an Energy Revolution in North America–It is just taking hold and you have an opportunity for your family’s portfolio to exact revenge on those gas lines, “fat cats,” and missed investments.
I welcome your comments and please stay tuned for future articles where I plan to offer a range of insights and solutions — from battle-tested fundamental and quantitative active management approaches to the qualitative side of being a professional investor.
About Michael Hakerem, CFA:
Michael embodies client-stewardship in all his work and happens to be a passionate expert in securities analysis, asset allocation, economic analysis, and wealth management solutions.