How To Cash In On The New Energy Boom In The U.S. With ETFs (XLE, AMLP)
Mike Burnick: Crude oil prices have been on a wild ride lately. Like other global markets, oil has been impacted by a rapid-fire barrage of headline-making events recently: From the euro-zone debt crisis … to QE3 … to China’s slowdown.
Volatility in crude oil trading pits has been extreme over the past few weeks. But that’s nothing but an extension of the roller-coaster ride for oil prices over the past few years.
After bottoming out below $80 a barrel in June, oil prices climbed steadily, rising 25 percent in just a matter of months.
Last week however, prices suffered a mini-crash, dropping nearly $10 a barrel in just three days ahead of a bearish oil inventory report that showed higher than expected U.S. stockpiles of crude.
Of course, there’s a long and growing list of tricky cross-currents impacting oil prices right now, including:
Uncertainty about oil demand in the face of a clearly slowing global economy …
The impact on commodity prices of another round of central bank monetary easing …
And of course the ever present risk of unrest in the Middle East.
These are just a few of the factors making it difficult to forecast the near-term direction of crude oil prices.
And energy sector stock prices have been just as volatile as crude. In fact, so far in 2012 the Energy Select Sector SPDR ETF (XLE) has swung in price from down 10 percent at the June low, to up 11 percent year-to-date at its high just two-weeks ago.
Of course, there are also some very important fundamental factors at work in the energy sector contributing to this volatility. And energy sector investors should pay close attention to these developments.
New Technology Triggers a
New American Energy Boom
As many investors are already aware, new drilling technology in recent years has lead to unexpected new oil and natural gas discoveries right here at home in the U.S.A.
The new methods for oil and gas extraction, such as fracking, have generated some controversy, but have also opened up vast new oil and gas fields to energy production. Plus, it’s allowing oil producers to squeeze even more production out of existing oil wells, including fields that were previously given up for dead.
Although still in the early stages, the new technology could be a game changer for the energy sector in the years ahead.
Last year, energy giant Anadarko Petroleum (APC) discovered a shale deposit in Colorado that could hold 1 to 2 billion barrels of recoverable reserves — it’s the largest new discovery in the U.S. in more than 40 years.
Anadarko’s CEO believes U.S. domestic production could double within the next 25 years as a result of this and other unconventional oil and gas finds. And the company is putting its money where its mouth is by planning to spend $1 billion a year developing this field.
According to research published last year by Goldman Sachs, the U.S. could become the world’s largest oil-producer by 2017, perhaps surpassing Russia and even Saudi Arabia.
The chart above clearly shows domestic oil production trending upward for the first time since the oil boom of the 1970′s and early 1980′s!
Aside from domestic producers like Anadarko, there are many U.S. companies that are well positioned to profit as the U.S. becomes a net exporter of energy in the years ahead.
Here’s something you may not be aware of: One of the best oil and gas sub-sectors to potentially profit from the new American energy boom are shares of master limited partnerships (MLPs).
Profiting from More Stable
Energy Infrastructure Investments
Most of these new, major oil and gas discoveries are found far away from major U.S. pipelines in Oklahoma and the refining hub on the Texas Gulf Coast.
Anadarko’s find is in the foothills of the Rocky Mountains … the booming Bakken Shale stretches from the Dakotas to Montana … and the celebrated Marcellus Shale is located in Pennsylvania, New York, and West Virginia.
This tells me the companies that own the best energy transportation and storage facilities stand to earn a fortune in the years ahead.
That’s why energy MLPs are perhaps in the best position to profit from the new American energy boom.
MLPs control and operate the key energy pipelines and storage terminals that are now in very high demand as the industry gears up to become major oil and gas exporters.
Their stocks have other big advantages over ordinary oil and gas stocks …
For one, MLPs tend to be less volatile since the pipelines and storage terminals they operate are typically leased under long-term contract. This helps insulate MLPs from volatile swings in crude oil and natural gas prices.
Plus, this toll-road-like business model keeps most MLPs flush with cash flow from operations, much of which they pay out to shareholders in big dividends. There are many energy sector MLPs to choose from, some with double-digit dividend yields.
But for my money, one of the best ways to invest in energy sector MLPs is with one of the many ETFs and ETNs available. That way you are more diversified among dozens of industry leading energy sector MLPs all in single transaction.
For instance, the Alerian MLP ETF (NYSEARCA:AMLP) tracks an index of 25 leading energy infrastructure players including Enterprise Products Partners, Kinder Morgan Energy Partners, and Plains All American Pipeline LP, among others.
This ETF also pays a fat 6 percent dividend yield — nearly four-times greater than the yield on the Energy Select Sector SPDR ETF (NYSEARCA:XLE) composed of U.S. oil and gas stocks.
Remember, during the Gold Rush many of the 49′ers who panned for gold never struck it rich — but plenty of folks made money by supplying the picks and shovels.
In the same way, energy sector MLPs aren’t as exposed to the additional risk of exploring and producing oil and gas — they don’t need to — because MLPs and their shareholders can just sit back and earn profits from energy transportation and storage instead.
So in my book, it’s a lower-risk, and potentially more stable way to cash-in on the NEW American energy boom!
Money and Markets (MaM) is published by Weiss Research, Inc. and written by Martin D. Weiss along with Nilus Mattive, Claus Vogt, Ron Rowland, Michael Larson. To avoid conflicts of interest, Weiss Research and its staff do not hold positions in companies recommended inMaM, nor do we accept any compensation for such recommendations. The comments, graphs, forecasts, and indices published in MaM are based upon data whose accuracy is deemed reliable but not guaranteed. Performance returns cited are derived from our best estimates but must be considered hypothetical in as much as we do not track the actual prices investors pay or receive. Regular contributors and staff include Andrea Baumwald, John Burke, Marci Campbell, Selene Ceballo, Amber Dakar, Maryellen Murphy, Jennifer Newman-Amos, Adam Shafer, Julie Trudeau, Jill Umiker, Leslie Underwood and Michelle Zausnig.
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